Attached files

file filename
EX-32.1 - SECTION 1350 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER AND FINANCIAL OFFICER. - LINGERIE FIGHTING CHAMPIONSHIPS, INC.f10q0510a1ex32i_xodtec.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION BY THE CHIEF EXECUTIVE AND FINANCIAL OFFICER - LINGERIE FIGHTING CHAMPIONSHIPS, INC.f10q0510a1ex31i_xodtec.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q/A
Amendment No. 1
 
(Mark One)
   
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED May 31, 2010
   
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
FOR THE TRANSITION PERIOD FROM __________ TO __________
 
COMMISSION FILE NUMBER: 333-148005

XODTEC LED, INC.
 (Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of incorporation or organization)
20-8009362
(I.R.S. Employer Identification No.)

2F, No.139, Jian 1st Rd., Jhonghe City,
Taipei County 235, Taiwan (R.O.C.)
 (Address of principal executive offices, Zip Code)

011-886-2-2228-6276
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Copies to:
Asher S. Levitsky P.C.
Sichenzia Ross Friedman Ference LLP
61 Broadway, 32nd Floor
New York, New York 10006
Phone: (212) 981-6767
Fax: (212) 930-9725

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    o  Yes   o  No

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 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 Exchange Act). Yes  o   No  x

The number of shares of registrant’s common stock outstanding, as of July 1, 2010 was 23,564,827.

 
 

 

XODTEC LED, INC.
Form 10-Q/A
For the Quarter Ended May 31, 2010

TABLE OF CONTENTS
   
Page No.
PART I. - FINANCIAL INFORMATION
Item 1.
Financial Statements
  3
 
Consolidated Balance Sheets as of May 31, 2010 (Unaudited) and February 28, 2010 (Audited)
  3
 
Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended May 31, 2010 (unaudited) and 2009 (unaudited and restated)
  4
 
Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2010 (unaudited) and 2009 (unaudited and restated)
  5
 
Notes to Unaudited Consolidated Financial Statements.
  6
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
  21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
  26
Item 4.
Controls and Procedures.
  26
 
PART II - OTHER INFORMATION
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
  29
Item 6.
Exhibits.
  29

 
-1-

 

EXPLANATORY NOTE

This quarterly report on Form 10- Q /A is being filed as an amendment to our quarterly report on Form 10-Q for the quarter ended May 31, 2010, which was filed with the Securities and Exchange Commission on July 20, 2010.  This amendment reflects changes in the financial statements, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 4 “Controls and Procedures” only to the extent that they relate to (i) the restated nature of our financial statements for the quarter ended May 31, 2009, (ii) the method of inclusion of the results of operations of a non-consolidated subsidiary in our financial statements and (iii) the material weakness of our internal controls.  No information in the Form 10-Q as initially filed has been updated.  Currently dated Exhibits 31.1 and 32.1, signed by the current principal executive and financial officer, is included in this filing.
 
FORWARD LOOKING STATEMENTS
 
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
 
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our report on Form 10-K as filed on July 19, 2010, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC.   You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
 
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 
-2-

 

PART 1 - FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS.

 
XODTEC LED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
May 31,
   
February 28
 
   
2010
   
2010
 
   
(Unaudited)
       
ASSETS
       
 
 
Current assets
 
 
   
 
 
      Cash and cash equivalents
  $ 139,820     $ 255,884  
      Restricted cash
    26,713       -  
      Notes receivable, net
    3,020       21,088  
      Accounts receivable, net
    155,643       103,472  
      Other receivables
    34,617       30,387  
      Inventories, net
    198,143       146,626  
      Prepayments
    36,969       69,537  
      Other current assets
    26,212       20,761  
   Total current assets
    621,137       647,755  
                 
Property and equipment, net
    629,557       631,773  
 
               
 Other Assets
               
      Deposits
    69,214       65,965  
      Deferred assets
    466,492       495,234  
   Total assets
  $ 1,786,400     $ 1,840,727  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
  Current liabilities
               
       Short-term borrowings from banks
  $ 48,660     $ 20,339  
       Notes payable
    89,675       157,109  
       Accounts payable
    73,252       70,000  
       Other payable
    450,450       556,163  
      Accrued liabilities
    191,396       145,951  
       Due to related parties
    1,631,159       1,775,314  
       Other current liabilities
    12,632       2,370  
 
               
    Total current liabilities
    2,497,224       2,727,246  
                 
  Long-term liability
    25,360       30,582  
                 
Total liabilities
    2,522,584       2,757,828  
Commitments and contingencies
               
Stockholders' equity
               
       Preferred stock, par value $0.001 per share, 10,000,000 shares
    -       -  
            authorized and 0 shares issued and outstanding
               
       Common stock( 225,000,000 authorized shares, par value $0.001 per share;
    23,565       22,430  
    23,564,827 and 22,430,004 issued and outstanding, respectively)
               
    Subscription receivable
    (130,000 )     (130,000 )
      Additional paid in capital
    4,482,355       3,677,767  
      Accumulated deficit
    (5,059,562 )     (4,445,123 )
      Accumulated other comprehensive gain - translation adjustments
    (52,542 )     (42,175 )
                 
     Total stockholders' equity
    (736,184 )     (917,101 )
     Total liabilities and stockholders' equity
  $ 1,786,400     $ 1,840,727  
                 
The accompanying notes are an integral part of the financial statements.
 

 
-3-

 

XODTEC LED, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
   
Three months ended May 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
         
(Restated)
 
             
Cash Flows from operating activities:
           
Net (loss)
  $ (614,439 )   $ (896,844 )
Adjustments to reconcile net income to net cash
               
provided by (used in) operating activities:
               
Depreciation and amortization
    25,827       7,024  
Issuance of common shares or warrants for professional services
    82,625       638,867  
Impairment loss on property and equipment
    -       -  
Loss on disposal of property and equipment
    -       -  
(Increase) Decrease in assets:
               
Notes receivable
    18,272       2,172  
Accounts receivable
    (52,667 )     (25,672 )
Other receivables
    (4,258 )     8,910  
Inventories
    (51,981 )     132,047  
Prepayments
    (12,551 )     95  
Other current assets
    (5,498 )     3,605  
Deposits
    (3,246 )     (1,781 )
Decrease (Increase) in liabilities:
               
Notes payable
    (68,239 )     6,279  
Accounts payable
    3,247       (88,595 )
Other payable
    4,362       (83 )
Accrued liabilities
    45,845       15,216  
Other current liabilities
    3,605       6,519  
                 
Net cash provided by(used in) operating activities
    (629,096 )     (192,241 )
                 
Cash Flows from Investing activities:
               
Increase in restricted cash
    (26,996 )     -  
Proceeds from disposal of property and equipment
    -       -  
Increase in long-term prepayments
    (14,591 )     (2,335 )
Purchase of property & equipment
    (129,105 )     -  
Net cash used in investing activities
    (170,692 )     (2,335 )
                 
Cash flows from financing activities:
               
Proceeds from (Repayment of) borrowings from banks
    23,316       (13,624 )
Proceeds from (Repayment of) related parties
    (146,694 )     163,550  
Proceeds from issuance of shares
    805,724       96,323  
                 
Net cash provided by financing activities
    682,346       246,249  
                 
Effect of exchange rate changes on cash and cash equivalents
    1,378       6,115  
                 
Effect of exchange rate changes on cash
               
                 
Net increase in cash and cash equivalents
    (116,064 )     57,788  
Cash and cash equivalents, beginning of the year
    255,884       62,048  
                 
Cash and cash equivalents, end of the year
  $ 139,820     $ 119,836  
                 
Supplemental disclosures of cash flow information:
               
Interest paid
  $ 696     $ 225  
Income taxes paid
  $ -     $ -  
 
The accompanying notes are an integral part of the financial statements.
 
 

 
-4-

 


XODTEC LED, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
   
Three months ended May 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
         
(Restated)
 
             
Cash Flows from operating activities:
           
Net (loss)
  $ (614,439 )   $ (896,844 )
Adjustments to reconcile net income to net cash
               
provided by (used in) operating activities:
               
Depreciation and amortization
    25,827       7,024  
Issuance of common shares or warrants for professional services
    82,625       638,867  
Impairment loss on property and equipment
    -       -  
Loss on disposal of property and equipment
    -       -  
(Increase) Decrease in assets:
               
Notes receivable
    18,272       2,172  
Accounts receivable
    (52,667 )     (25,672 )
Other receivables
    (4,258 )     8,910  
Inventories
    (51,981 )     132,047  
Prepayments
    (12,551 )     95  
Other current assets
    (5,498 )     3,605  
Deposits
    (3,246 )     (1,781 )
Decrease (Increase) in liabilities:
               
Notes payable
    (68,239 )     6,279  
Accounts payable
    3,247       (88,595 )
Other payable
    4,362       (83 )
Accrued liabilities
    45,845       15,216  
Other current liabilities
    3,605       6,519  
                 
Net cash provided by(used in) operating activities
    (629,096 )     (192,241 )
                 
Cash Flows from Investing activities:
               
Increase in restricted cash
    (26,996 )     -  
Proceeds from disposal of property and equipment
    -       -  
Increase in long-term prepayments
    (14,591 )     (2,335 )
Purchase of property & equipment
    (129,105 )     -  
Net cash used in investing activities
    (170,692 )     (2,335 )
                 
Cash flows from financing activities:
               
Proceeds from (Repayment of) borrowings from banks
    23,316       (13,624 )
Proceeds from (Repayment of) related parties
    (146,694 )     163,550  
Proceeds from issuance of shares
    805,724       96,323  
                 
Net cash provided by financing activities
    682,346       246,249  
                 
Effect of exchange rate changes on cash and cash equivalents
    1,378       6,115  
                 
Effect of exchange rate changes on cash
               
                 
Net increase in cash and cash equivalents
    (116,064 )     57,788  
Cash and cash equivalents, beginning of the year
    255,884       62,048  
                 
Cash and cash equivalents, end of the year
  $ 139,820     $ 119,836  
                 
Supplemental disclosures of cash flow information:
               
Interest paid
  $ 696     $ 225  
Income taxes paid
  $ -     $ -  
 
The accompanying notes are an integral part of the financial statements.
 
 

 
-5-

 
 
XODTEC LED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2010

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Xodtec LED, Inc.  (“Company”) is a Nevada corporation incorporated on November 29, 2006, under the name Sparking Events, Inc.  On June 28, 2009, the Company’s corporate name was changed to “Xodtec Group USA, Inc.” and on May17, 2010 the Company’s corporate name was changed to “Xodtec LED, Inc.”

The Company, through its subsidiaries, is engaged in the design, marketing and selling of advanced lighting solutions which are designed to use less energy and have a longer life than traditional incandescent, halogen, fluorescent light sources.  The Company’s wholly-owned subsidiaries, Xodtec Technology Co., Ltd. (“Xodtec”); Targetek Technology Co., Ltd. (“Targetek”); UP Technology Co., Ltd. (“UP”), are organized under the laws of the Republic of China (Taiwan).  The Company also owns a 35% interest in Radiant Sun Development S.A., a company organized under the laws of the Independent State of Samoa (“Radiant Sun”).

On April 1, 2009, in anticipation of the exchange agreement described in the following paragraph, APlus International, Ltd., a Nevada limited liability company (“APlus”), acquired all of the capital stock of Xodtec, Targetek and UP, pursuant to agreements with the shareholders of each of these companies and acquired a 35% interest in Radiant Sun pursuant to an agreement with the holders of 35% of the capital stock of Radiant Sun.  As a result of these agreements, the former shareholders of Xodtec, Targetek and UP and the former holders of 35% of the stock of Radiant Sun were the sole members of APlus.

On April 20, 2009, the Company entered into an exchange agreement with APlus and its members pursuant to which the Company, then known as Sparking Events, Inc. acquired all of the stock of Xodtec, Targetek and UP and APlus’ 35% interest in Radiant Sun in exchange for 16,000,002 shares of common stock.  The transaction pursuant to which the Company issued 16,000,002 shares of common stock to the former members of APlus in exchange for all of the stock of Xodtec, Targetek and UP and APlus’ 35% interest in Radiant Sun is referred to as the reverse acquisition.

Simultaneously with the reverse acquisition, the Company’s then principal stockholder transferred to the Company for cancellation, without consideration, 27,000,000 shares of common stock owned by him.

At the time of the reverse acquisition, the Company was a blank check shell company and was not engaged in any business.  Upon completion of the reverse acquisition, the Company’s business became the business of Xodtec, Targetek and UP.  Radiant Sun did not have any significant operations prior to the reverse acquisition.

Under generally accepted accounting principles, the acquisition by the Company of Xodtec, Targetek and UP is equivalent to the acquisition by APlus of the Company, then known as Sparking Events, Inc., with the issuance of stock by APlus for the net monetary assets of the Company.  This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure.  Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse acquisition accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, APlus.   Since APlus was organized to acquire Xodtek, Targetek and UP on April 1, 2009, and had no operations, the Company’s historical financial statements reflect the operations of Xodtek, Targetek and UP prior to April 1, 2009, the combined operations of APlus, Xodtek, Targetek and UP from April 1, 2009 to April 20, 2009, and the combined operations of these companies and the Company from April 20, 2009.  The accompanying financial statements reflect the recapitalization of the shareholders’ equity as if the transactions occurred as of the beginning of the first period presented.  Thus, only the 16,000,002 shares of common stock issued to the former APlus members are deemed to be outstanding for all periods reported prior to the date of the reverse acquisition.   The 1,380,000 shares of common stock that were outstanding on April 20, 2009, after giving effect to the cancellation of the 27,000,000 shares that were acquired by the Company and cancelled, are treated as if they were issued on April 20, 2009, as part of a recapitalization.

 
-6-

 

The Company has the following operating subsidiaries:

-  
Xodtec Technology Co., Ltd., was set up on February 5, 2005 is mainly engaged in LED lighting ODM/OEM and distribution in Taiwan business.

-  
UP Technology Co., Ltd., was set up on January 9, 1997 and is mainly engaged in LED lighting product distribution in Taiwan business.

-  
Targetek Technology Co., Ltd., was set up on March 26, 1997 and is mainly engaged in professional translation business.

Restatement of Prior Financial Statements

The Company’s financial statements for the three months ended May 31, 2009 have been restated to reflect corrections in the financial statements previously provided.  In connection with the audit of the Company’s financial statements for the fiscal year ended February 28, 2010, the Company determined that it did not have sufficient documentation to confirm previously reported revenue, cost of revenue, selling, general and administrative expenses, and weighted average common shares outstanding.  As a result, the consolidated statements of operations and other comprehensive income and statement of cash flows were restated.

The following table sets forth the consolidated statement of operations and other comprehensive income and statements of cash flows of the Company for the three months ended May 31, 2009 as initially presented and as restated:
 
   
As Originally
         
Effect of
 
   
Reported
   
As Adjusted
   
Change
 
Revenue
  $ 1,179,154     $ 230,087     $ (949,067 )
Cost of revenue
    189,872       219,628       29,756  
Gross profit
    989,282       10,459       (978,823 )
Selling, general and administrative expenses
    265,063       906,901       641,838  
Net operating income (loss)
    724,219       (896,442 )     (1,620,661 )
Other expense
    (419 )     (402 )     17  
Net income (loss)
  $ 723,800     $ (896,844 )   $ (1,620,644 )
Translation adjustments
    -       77,191       77,191  
Comprehensive income (loss)
  $ 723,800       (819,653 )   $ (1,543,453 )
Net income (loss) per share
                       
- Basic
  $ 0.04     $ (0.05 )        
- diluted
  $ 0.04     $ (0.05 )        
Weighted average common shares outstanding
                       
- Basic
    18,050,000       17,693,046          
- Diluted
    18,050,000       17,693,046          
 
 
-7-

 
 
   
As Originally
         
Effect of
 
   
Reported
   
As Adjusted
   
Change
 
Cash Flows from operating activities:
                 
Net income (loss)
  $ 723,800     $ (896,844 )   $ (1,620,644 )
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                       
Depreciation and amortization
    7,120       7,024       ( 96 )
Issuance of common shares or warrants for professional services
    -       638,867       638,867  
(Increase) Decrease in assets:
                       
Notes receivable
    (4,913 )     2,172       7,085  
Accounts receivable
    (372,710 )     (25,672 )     347,038  
Other receivables
    -       8,910       8,910  
Inventories
    87,265       132,047       44,782  
Prepayments
    1,356       95       (1,261 )
Other current assets
    (8,095 )     3,605       11,700  
Deposits
    -       (1,781 )     (1,781 )
Other assets
    (13,435 )     -       13,435  
Decrease (Increase) in liabilities:
                       
Notes payable
    117,683       6,279       (111,404 )
Accounts payable
    22,993       (88,595 )     ( 111,588 )
Other payable
    -       (83 )     (83 )
Accrued liabilities
    -       15,216       15,216  
Other current liabilities
    1,178       6,519       5,341  
Net cash provided by (used in) operating activities
    562,242       (192,241 )     (754,483 )
Cash Flows from Investing activities:
                       
Purchase of property and equipment
    (5,625 )     -       5,625  
Increase in deferred charges
    (4,472 )     -       4,472  
Increase in refundable deposit
    (4,310 )     -       4,310  
Increase in other receivable
    (57,354 )     -       57,354  
Increase in long-term prepayments
    -       (2,335 )     (2,335 )
Net cash used in investing activities
    (71,761 )     (2,335 )     69,426  
Cash flows from financing activities:
                       
Proceeds from (Repayment of)  borrowings from banks
    (11,500 )     (13,624 )     (2,124 )
Proceeds from (Repayment of) related parties
    (510,992 )     163,550       674,542  
Proceeds from issuance of shares
    -       96,323       96,323  
Net cash provided (used in) by financing activities
    (522,492 )     246,249       768,741  
Effect of exchange rate changes on cash and cash equivalents
    84,485       6,115       (78,370 )
Net increase in cash and cash equivalents
    52,474       57,788       5,314  
Cash and cash equivalents, beginning of the year
    107,340       62,048       (45,292 )
Cash and cash equivalents, end of the period
  $ 159,814     $ 119,836     $ (39,978 )
Supplemental disclosures of cash flow information:
                       
Interest paid
  $ 224     $ 225          
Income taxes paid
  $ -     $ -          
 
Stock Distribution

On April 30, 2009, the Company’s Articles of Incorporation were amended to increase the number of authorized shares of common stock from 75,000,000 to 225,000,000 and to effect a 3-for-1 stock split.  The par value of $0.001 per share was not changed as a result of the stock split.  All share and per share references in these financial statements retroactively reflect this stock split.

 
-8-

 

The Company’s authorized capital stock consists of 10,000,000 shares of preferred stock, par value $0.0001 per share, and 225,000,000 shares of common stock, par value $0.001 per share.  The board of directors has broad discretion in determining the rights, preferences and privileges of the holders of one or more series of preferred stock. The Company changed the par value of its preferred stock from $0.0001 to $0.001 on March 31, 2010 and restored the 10,000,000 shares of preferred stock which had previously been designated as series A convertible preferred stock to the status of authorized and unissued shares of preferred stock with no designation as to class or series.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles for interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended February 28, 2010. Operating results for the three-month period ended May 31, 2010 are not necessarily indicative of the results that may be expected for the year ended February 28, 2011.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.

Segment Information

ASC 280 requires companies to report information about operating segment in interim and annual financial statements. It also requires segment disclosures about products and services geographic and major customers. The Company has determined that it does not have any separately reportable operating segments.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with ASC 605 (Originally issued as Staff Accounting Bulletin (SAB) 104). Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.   Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Sales taxes are not recorded as a component of sales.

 
-9-

 
 
Cost of Sales

The cost of sales represents, primarily, the cost of manufacturing by third party manufacturers based on a contract price, as well as warehousing costs, shipping and handling costs, and any cost related inventory adjustment, including write downs for excess and obsolete inventory.

Shipping and Handling Costs

The Company records all charges for outbound shipping and handling as revenue. All compounding shipping and handling costs are classified as cost of goods sold.

Accounts Receivable

Accounts receivable are carried at original invoice amount less the allowance for doubtful accounts based on a review of all outstanding amounts at year end. Management determines the allowance for doubtful accounts by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible.

Inventories

The Company’s inventories are stated at the lower-of-cost-or-market price.  Cost is determined on the weighted average method. The Company provides for a lower-of-cost-or-market adjustment against gross inventory values. The Company recorded $0 and $12,467 of inventory valuation reserve for obsolete or slow-moving items as of May 31, 2010 and 2009, respectively.
Equity investment
 
The Company accounts for its interest in its equity investments pursuant to ASC 323 “Investments – Equity Method and Joint Ventures,” which sets forth guidance as to the treatment of equity investments.  Because the Company’s only unconsolidated subsidiary is inactive, does not meet the test of a significant subsidiary under Rule 1-02(w)of Regulation S-X and any summarized information is de minimus, the Company is not required to include summarized financial information with respect to this entity and the absence of summarized financial information does not impact its consolidated financial statements.
 
Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Major improvements and addition which can prolong the service life of fixed assets are counted as capital expenditures and recorded as fixed assets. Expenditures on regular repairs and maintenance are recorded as expenses.

Property and equipment are depreciated according to the service life and using the average method, with one-year residual value. Additions are depreciated according to their respective estimated service life. Major improvements are depreciated based on the remaining service lives of fixed assets. While assets are continually in use after the expiration of its service life, the residual values and service lives are estimated and depreciated accordingly and continually. The gain (loss) on disposal of assets is recognized as non-operating revenue (expenditure) in the period of sale or disposal.
Depreciation is computed using the straight-line method over the estimated useful lives as follows:

 
Useful Lives (Years)
Transportation
5 years
Office equipment
3-6 years
Equipments for leases
12 years
Other equipment
3-6 years


 
-10-

 
 
Impairment of Long-Lived Assets
 
The Company accounts for the impairment and disposition of long-lived assets in accordance with ASC 360, Property, Plant and Equipment. The Company periodically evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset were less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.
 
The assumptions used by management in determining the future cash flows are critical. In the event these expected cash flows are not realized, future impairment losses may be recorded.
 
Subscription Receivable

The subscription receivable reflects the sales of common stock in July 2009 for which the Company had not received payment as of February 28, 2010.

Income taxes
 
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which  requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the opinion of management, it is more likely than not that some or all of any deferred tax assets will not be realized.
 
The Company adopted ASC 740-10-25, Income Taxes- Overall-Recognition, on January 1, 2007, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company did not recognize any additional liabilities for uncertain tax positions as a result of the implementation of ASC 740-10-25.
 
Net Loss per Share

The Company calculates its basic and diluted earnings per share in accordance with ASC 260. Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive warrants and options and convertible securities. There were no convertible securities outstanding during the year ended February 28, 2010.  The Company uses the treasury stock method to reflect the potential dilutive effect of the unvested stock options and unexercised warrants. Because the Company incurred losses for three month periods ended May 31, 2010 and 2009, the number of basic and diluted shares of common stock is the same since any effect from outstanding warrants would be anti-dilutive.

 
-11-

 

Gain (Loss) on Exchange

Foreign-currency transactions are recorded in New Taiwan dollars (“NTD”) at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into NTD, or when foreign-currency receivables or payables are settled, are credited or charged to income in the year of conversion or settlement. On the balance sheet dates, the balances of foreign-currency assets and liabilities are restated at the prevailing exchange rates and the resulting differences are charged to current income.
 
Translation Adjustment
 
 The Company’s financial statements are presented in the U.S. dollar ($), which is the Company’s reporting and functional currency. The functional currency of the Company’s subsidiaries is NTD. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of income. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of income.
 
In accordance with ASC 830, Foreign Currency Matters, the Company translates the assets and liabilities into U.S. dollars  using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD into U.S. dollar are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for interim financial statements in accordance with ASC 830, Foreign Currency Matters, are as follows:
 
   
Average Rate for the three months
 
May 31,
 
2010
   
2009
 
Taiwan dollar (TWD)
 
TWD 31.73182
   
TWD 33.68054
 
United States dollar ($)
  $ 1.00     $ 1.00  
 
   
Exchange Rate at
 
May 31,
    2010       2009  
Taiwan dollar (TWD)
 
TWD 32.06900
   
TWD 32.65000
 
United States dollar ($)
  $ 1.00     $ 1.00  
 
Comprehensive Income
 
Comprehensive income includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income on its statements of stockholders’ equity.
 
Share Based Expenses

ASC 718 requires a public entity to expense the cost of employee and non-employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements.  The Company expenses share-based costs in the period incurred.

 
-12-

 

NOTE 3 - GOING CONCERN MATTERS
 
The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the three months ended May 31, 2010, the Company incurred net losses of approximately $615,000.  In addition, the Company had a negative cash flow in operating activities amounting approximately $630,000 in the three months ended May 31, 2010, and the Company’s accumulated deficit was approximately $5,100,000 as of May 31, 2010.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company may seek additional funding through borrowings from financial institutions and defer the amounts due under the credit line. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. However, as a result of the Company’s loss for three month periods ended May 31, 2010, the need for the Company to restate prior year’s financial statements, the absence of financial controls, the Company’s low stock price and the absence of a strong market for the Company’s common stock, the Company may difficulty raising additional funds in the equity market. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
 
In April 2009, the FASB issued three related staff positions to clarify the application of FASB ASC 820 to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair value of financial instruments in interim periods. The final staff positions are effective for interim and annual periods ending after June 15, 2009.
 
·  
FASB ASC 820 (Transitional 820-10-65-4)—which provides guidance on how to determine the fair value of assets and liabilities under FASB ASC 820 in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
 
·  
FASB ASC 320—which modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. It also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.
 
·  
FASB ASC 820-10-50—which requires disclosures of the fair value of financial instruments within the scope of FASB ASC 820 in interim financial statements, adding to the current requirement to make those disclosures in annual financial statements. The staff position also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period.
 

 
-13-

 

In June 2009, the Financial Accounting Standards Board (‘‘FASB’’) issued its final Statement of Financial Accounting Standards (‘‘SFAS’’) No. 168, ‘‘The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162’’ (‘‘SFAS No. 168’’). SFAS No. 168 established the FASB Accounting Standards Codification (‘‘ASC’’) as the single source of authoritative U.S. GAAP to be applied by nongovernmental entities in the preparation of financial statements. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance in the ASC carries an equal level of authority. The ASC supersedes all previously existing non-SEC accounting and reporting standards. The ASC simplifies user access to all authoritative U.S. GAAP by reorganizing previously issued U.S. GAAP pronouncements into approximately 90 accounting topics within a consistent structure, without creating new accounting and reporting guidance. The ASC became effective for financial statements issued for interim and annual periods ending after September 15, 2009; accordingly, we adopted the ASC in the third quarter of fiscal 2009. Following SFAS No. 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the ASC, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the ASC. For the discussion herein, we refer to ASC citations that relate to ASC Topics and their descriptive titles, as appropriate, and no longer refer to citations that relate to accounting pronouncements superseded by the ASC.
 
In June 2009, the FASB issued ASC 860, which eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. FASB ASC 860 will be effective for transfers of financial assets in fiscal years beginning after November 15, 2009 and in interim periods within those fiscal years with earlier adoption prohibited. The adoption of ASC 860 had no impact on the Company’s Consolidated Financial Statements.
 
In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of 2011. Early adoption is allowed. The Company does not believe adoption of this guidance will have a material impact on its consolidated financial statements.
 
In January 2010, the FASB issued new accounting guidance related to the disclosure requirements for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements for related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. The Company does not believe the adoption of this guidance will have a material impact to the Company’s consolidated financial statements.
 
In August 2009, the FASB issued ASU 2009-05, which provides additional guidance under the Fair Value Measurements and Disclosures Topic, ASC 820-10 Application to Liabilities. The guidance clarifies that the quoted price for the liability when traded as an asset in an active market is a Level 1 measurement, when no adjustment to the quoted price is required. In the absence of a Level 1 (quoted price) measurement, an entity must use one or more valuation techniques to estimate fair value in a manner consistent with the principles in ASC 820. The Company does not expect adoption of this guidance to have an impact on the Company’s consolidated financial statements.
 

 
-14-

 
 
In October 2009, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements (Topic 605), or ASU 2009-13. ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of Accounting Standards Codification (ASC) Subtopic 605-25. The consensus in ASU 2009-13 provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management's estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. The present standard requires that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. In addition, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not believe this guidance will have a material impact on its financial position or results of operations.
 
In October 2009, the FASB issued ASU 2009-14 which amended the accounting requirements under the Software Topic, ASC 985-605 Revenue Recognition. The objective of this update is to address the accounting for revenue arrangements that contain tangible products and software. Specifically, products that contain software that is “more than incidental” to the product as a whole will be removed from the scope of ASC subtopic 985-605. The amendments align the accounting for these revenue transaction types with the amendments under ASU 2009-13 mentioned above. The guidance provided within ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010 and allows for either prospective or retrospective application, with early adoption permitted. The Company does not expect adoption of this guidance to have an impact on the Company’s consolidated financial statements.
 
In October 2009, the FASB issued an ASU 2009-15 regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
 
NOTE 5 - REVERSE ACQUISITION.

On April 20, 2009, the Company acquired APlus pursuant to the reverse acquisition.  Pursuant to the exchange agreement between the Company, APlus and the members of APlus, the Company issued 16,000,002 shares of common stock in exchange for all of the stock of Xodtec, Targetek and UP and APlus’ 35% interest in Radiant Sun.

Simultaneously with the reverse acquisition, the Company’s then principal stockholder transferred to the Company 27,000,000 shares of common stock for no consideration.  These shares were cancelled.  As a result of the reverse acquisition and the cancellation of the 27,000,000 shares from the then principal shareholder, the former members of APlus beneficially owned approximately 92% of the outstanding shares of our common stock upon completion of the reverse acquisition.

In connection with the reverse acquisition, the Company entered into the following agreements.

 
-15-

 

On April 20, 2009, the Company issued 350,001 shares of common stock and two-year warrants to purchase 250,000 shares of common stock at an exercise price of $1.00 per share, for services rendered by Dragonfly Capital Partners, LLC (“Dragonfly”) in connection with the Exchange.  The common stock was valued at $0.30 per share, for a total of $105,000, and the warrants were valued at $34,191 using the Black-Scholes valuation model. Using the Black-Scholes valuation model, the value of these warrants is $34,191. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions:  discount rate – 0.735%; dividend yield – 0%; expected volatility – 72% and term of 1.5 years. The Company has agreed to register the common stock issued to Dragonfly and the shares of common stock issuable upon exercise of Dragonfly’s warrants.

On April 22, 2009 the Company entered into a financial advisory agreement with Unise Investment Corp. (“Unise”) to provide financial consulting services for which the Company issued 350,001 shares of common stock.   The common stock was valued at $0.30 per share, for a total of $105,000.

On April 23, 2009, the Company issued warrants to purchase 1,500,000 shares of common stock to Unise, of which (i) warrants to purchase 200,000 shares of common stock at $0.65 per share expired unexercised on October 23, 2009, (ii) warrants to purchase 500,000 shares of common stock at $1.00 per share expire on April 23, 2011 and (iii) warrants to purchase 800,000 shares of common stock at $1.50 per share expire on April 23, 2011.  The Company agreed to register the shares of common stock underlying these warrants. Using the Black-Scholes valuation model, the value of these warrants is $154,676. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions:  discount rate – 0.34% to 0.75%; dividend yield – 0%; expected volatility – 72% and term of 6 months, 1.5 years and 1.5 years.

The Company issued the shares and warrants issued Dragonfly and Unise, as described in the preceding paragraphs, for consulting service. The value of the shares and warrants were included in general and administrative expenses for the three months ended May 31, 2009.

NOTE 6 – CAPITAL STOCK AND SHARE-BASED PAYMENTS

On July 8, 2009, the Company issued and sold 1,000,000 shares of common stock to certain investors for a cash price of $0.65 per share, or a total of $650,000.  As of February 28, 2010, the Company had received $520,000, and the balance of $130,000 had not been received and is treated as a subscription receivable.

Except for the securities issued in connection with, or at the time of, the reverse acquisition, which are described in Note 5, the Company did not issue any securities during the three months ended May 31, 2009. The Company issued securities during the three months ended May 31, 2010 as follows:

On February 23, 2010, the Company issued 100,000 shares of common stock at $0.45 per share, for  a total of $45,000, for the services provided in connection with a trade show in March 2010.

During the first quarter of 2010, the Company issued and sold 1,134,823 shares of common stock to certain investors for a cash price of $0.71 per share, for a total of $805,724.

Warrant activity for the three months ended May 31, 2010, is summarized as follows:
 
   
Shares subject to Warrants
   
Weighted Average Exercise Price
 
Balance at February 28, 2010
 
2,550,000
   
$
1.35
 
Granted
   
-
         
Exercised
   
-
         
Balance at May 31, 2010
 
2,550,000
   
$
1.35
 
 
 
-16-

 

The following table summarizes the shares of common stock issuable upon exercise of warrants outstanding at May 31, 2010:
 
Exercise Price
   
Outstanding at May 31, 2010
   
Weighted Average Remaining Contractual Live (Years)
   
Number Exercisable at May 31, 2010
 
$
1.00
     
750,000
     
0.9
     
750,000
 
$
1.50
     
1,800,000
     
1.7
     
1,800,000
 


NOTE 7 – INVENTORIES

As of May 31, 2010 and February 28, 2010, the Company’s inventory consisted of raw material, work in progress and finished goods as follows:
 
   
May 31, 2010
   
February 28, 2010
 
Raw Material
 
$
126,119
   
$
76,044
 
Work-in-process
   
9,190
     
11,269
 
Finished goods
   
62,834
     
59,313
 
   
$
198,143
   
$
146,626
 
 
NOTE 8 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

   
May 31,
   
February 28,
 
   
2010
   
2010
 
Office equipment
  $ 83,808     $ 66,365  
Equipments for leases
    756,105       755,681  
Other equipment
    -       4,016  
Total property and equipment
    839,913       826,062  
Accumulated depreciation
    (54,535 )     (38,555 )
Accumulated impairment 
    (155,821 )     (155,734 )
Total property and equipment, net
  $ 629,557     $ 631,773  

 
-17-

 

Depreciation and amortization expenses during the three months ended May 31, 2010 and 2009 were $25,827 and $7,024, respectively.

NOTE 9 – DEFERRED ASSETS

Deferred assets consisted of the following:

   
May 31, 2010
   
February 28, 2010
 
Long-term prepaid professional fee
  $ 413,875     $ 451,500  
Other long-term prepaid expenses
    52,617       43,734  
Total deferred assets
  $ 466,492     $ 495,234  

NOTE 10 - SHORT-TERM BORROWINGS FORM BANKS

Short-term borrowings from banks consisted of the following at May 31, 2010 and February 28, 2010:
 
   
May 31,
   
February 28,
 
   
2010
   
2010
 
First Bank, interest at 4.94%, maturity date 7/1/2012
  $ 45,955     $ 50,921  
Union Bank, interest at 3.22%, maturity date 3/29/2011
    28,065       -  
Total
    74,020       50,921  
Current portion
  $ 48,660     $ 20,339  
Long-term portion
  $ 25,360     $ 30,582  

NOTE 11 - INCOME TAXES

The Company did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because the Company has experienced operating losses for U.S. federal income tax purposes since inception. When it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit.  The Company pays income taxes under the laws of the Republic of China (Taiwan).  For the three months ended May 31, 2010 and 2009, there were no income tax expenses.

NOTE 12 - RELATED PARTY TRANSACTIONS

-  
Due to related parties

As of May 31, 2010 and February 28, 2010, the Company borrowed from its Company’s CEO, in the aggregated amount of $413,656 and $337,155, respectively, for general working capital needs. The borrowings do not bear interest and are payable on demand.

 
-18-

 

As of May 31, 2010 and February 28, 2010, the Company borrowed from one of the Company’s director, the aggregated amount of $1,116,564 and $1,332,187, respectively, for general working capital needs. The borrowings do not bear interest and are payable on demand.

As of May 31, 2010 and February 28, 2010, the Company borrowed from the president of the Company’s subsidiary, UP, the aggregated amount of $100,939 and $105,972, respectively, for general working capital needs. The borrowings do not bear interest and are payable on demand.

NOTE 13 - CONCENTRATION

-  
 Major customers

No customer accounted for 10% or more of the Company’s revenue for the three months ended May 31, 2010 or 2009, although two customers each accounted for approximately 9% of revenue in the three months ended May 31, 2010 and two different customers each accounted for approximately 9% of revenue in the three months ended May 31, 2009.

Substantially all of the Company's revenue is derived from sales of LED lighting products.  Any significant decline in market acceptance of the Company's products or in the financial condition of the Company's existing customers could impair the Company's ability to operate effectively.

-  
 Major suppliers

The following table provides information as to purchase to each major supplier for three month periods ended May 31, 2010 and 2009, respectively, and the accounts payable to such suppliers:

   
Purchase
Three months Ended May 31,
   
Accounts Payable
At May 31,
 
2010
           
-Vendor A
  $ 14,807     $ -  
-Vendor B
    14,545       6,292  
   
2009
               
-Vendor C
    30,190       153,534  

NOTE 14 - COMMITIMENTS AND CONTINGENCIES

The Company rent offices under several operating leases. The Company minimum rent for the future is following as:

 
-19-

 


Twelve months ending
 
Amounts
 
May 31, 2011
 
$
156,294
 
May 31, 2012
 
$
85,751
 

The Company restated its financial statements at February 28, 2009 and for the year then ended, and will restate the financial statements for each quarter in the fiscal year ended February 28, 2010.  The revenue and results of operations for three month periods ended May 31, 2009 reflect a significant negative change from the information provided for the quarters in that year.  The Company cannot determine whether it will incur any liability as a result of such restatement.

NOTE 15 - OTHER COMPREHENSIVE INCOME

Balances of related after-tax components comprising accumulated other comprehensive loss, included in stockholders’ equity and at May 31, 2010 and February 28, 2010 are as follows:

   
Foreign Currency Translation Adjustment
 
Balance at February 28, 2010
 
$
(42,175)
 
Change for three month periods ended
   
(10,367)
 
         
Balance at May 31, 2010
 
$
(52,542)
 
 
 
-20-

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

We design, market and sell advanced LED lighting products and solutions. Our products cover a broad range of technically innovative outdoor lighting, indoor general and accent lighting, and color-changing lighting lamps and fixtures that are used for applications in commercial, architectural, residential, hospitality, entertainment and consumer markets. We generate revenue from selling our lighting products and solutions into commercial, architectural, residential and other markets. Commercial sales include the lighting solution design and applications of advanced LED lamps, fixtures, and associated control systems. Architectural sales mainly focus on the installation of wall wash lighting, light strips and display panels. Residential sales are addressed to the replacement market for traditional energy-consuming lighting products such as incandescent lamps, compact fluorescent lamps, and fluorescent tubes.

Revenue is derived from sales of our advanced lighting products and systems.   In marketing our products, we sell LED products as stand-alone items to customers who want to purchase the LED products without any related services, and we provide project services, which include the design, implementation and related consulting services as well as the LED products.  We have recently commenced marketing our LED systems to major potential customers under a program in which our revenue is based on the savings the customer realizes from using our system rather than the customer’s existing system.  Through May 31, 2010, we have not generated any revenue from this type of sale.

Our ability to be successful is dependent upon our ability to offer customers lighting solutions that require our know-how in designing a system to meet the specific needs of the customer at a cost which is acceptable to the customer.  To the extent that stand-alone LED products become commodities with the customer looking solely to price, we will need to distinguish ourselves by offering solutions of which the LED product is an element.  At present, our gross margin on LED products is significantly less than our gross margin on project-based lighting solutions.  During the quarter ended May 31, 2010, our gross margin was 28.0%, as compared with 4.6% for the three month periods ended May 31, 2009rimarily because Xodtec has reduced the sales of GPS products and information globalization service in Q1 2011 by increasing the sale of LED lighting products and energy-saving solutions instead. As LED lighting and energy-saving solutions generally generate higher profit margins than GPS sale and information globalization services, so our gross margins have increased in the quarter ended May 31, 2011. However, to the extent that we offer low prices for the LED products in order to generate sales and are not able to combine the low prices for the LED prices with a project which also requires our services, our ability to operate profitably will be impaired, especially to the extent that LED users do not seek services as part of a project.  We cannot assure you that we will be successful in marketing projects which require our know-how in the design of a lighting solution.
 
We require significant cash for the development of our business.  In offering project-based solutions and in offering lighting solutions where our revenue is dependent on the customers’ cost savings is very capital intensive, since we will have to finance both the LED products and the design and other services significantly in advance of receipt of payment.  Our failure to obtain the necessary funding will impair our ability to generate revenue from this type of sale.  To the extent that we have to rely on the sale of LED products, our margins, as well as our ability to operate profitably, will be impaired.

Prior to April 2009, we were a privately owned company, and we did not have the expenses of a public company.  During the three months ended May 31, 2009, we incurred general and administrative expenses of approximately $640,000 in connection with the reverse acquisition.  During the three months ended May 31, 2010, we incurred general and administrative expenses of approximately $100,000 as a result of being a public company, which were primarily professional expenses.

Our internal financial statements are maintained in New Taiwan Dollars “NTD”. The financial statements included in this Form 10-Q are expressed in United States dollars. The translation adjustments in expressing the financial statements in United States dollars is shown on the statements of operation as a translation adjustment, and the cumulative translation adjustment is shown as an element of stockholders’ equity.

Effect of Absence of Financial Controls; Changes from Previously Reported Results

In the course of preparing our annual financial statements, we determined that we did not have sufficient accounting controls in place in order to enable us to verify key financial items, including revenue and cost of revenue. In this connection, we determined that we did not have sufficient documentation to confirm previously reported revenue, cost of revenue, selling, general and administrative expenses, and weighted average common shares outstanding.  As a result, the consolidated statements of operations and other comprehensive income and statement of cash flows were restated.  As a result, we incurred a net loss of $2.6 million on revenue of $992,000 for the year ended February 28, 2010, as compared with net income of $753,000 on revenue of $11.5 million for the nine months ended November 30, 2009.  We also restated our financial statements at for the year ended February 28, 2009.  These problems affected each quarter during 2009, and, as a result, our financial statements for the three months ended May 31, 2009 were restated.  As originally reported, we showed net income of $724,000 on revenue of $1.2 million.  As restated, we reported a net loss of $897,000 on revenue of $230,000.  Although we are taking steps to implement financial controls, we cannot assure you that we will be able to implement financial controls in a timely manner or that our controls will be effective.
 

 
-21-

 

Significant Accounting Estimates and Policies

The discussion and analysis of our financial condition and results of operations is based upon our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with ASC 605 (Originally issued as Staff Accounting Bulletin (SAB) 104). Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.   Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Sales taxes are not recorded as a component of sales.

Comprehensive Income

Comprehensive income includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income on its statements of stockholders’ equity.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the opinion of management, it is more likely than not that some or all of any deferred tax assets will not be realized.

The Company adopted ASC 740-10-25, Income Taxes- Overall-Recognition, on January 1, 2007, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company did not recognize any additional liabilities for uncertain tax positions as a result of the implementation of ASC 740-10-25.

Inventories

The Company’s inventories are stated at the lower-of-cost-or-market price.  Cost is determined on the weighted average method. The Company provides for a lower-of-cost-or-market adjustment against gross inventory values.  The Company had no lower-of-cost-or-market adjustments to its inventories for the three month periods ended May 31, 2010 and theyears ended February 28, 2010.

Property, Plant and Equipment

Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Major improvements and addition which can prolong the service life of fixed assets are counted as capital expenditures and recorded as fixed assets. Expenditures on regular repairs and maintenance are recorded as expenses.

Property and equipment are depreciated according to the service life and using the average method, with one-year residual value. Additions are depreciated according to their respective estimated service life. Major improvements are depreciated based on the remaining service lives of fixed assets. While assets are continually in use after the expiration of its service life, the residual values and service lives are estimated and depreciated accordingly and continually. The gain (loss) on disposal of assets is recognized as non-operating revenue (expenditure) in the period of sale or disposal.

Depreciation is computed using the straight-line method over the estimated useful lives as follows:

 
-22-

 

 
Useful Lives (Years)
Transportation
5 years
Office equipment
3-6 years
Equipment for leases
12 years
Other equipment
3-6 years

Research and development

Research and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily consist of cost of material used and salaries paid for the development of our products and fees paid to third parties. Our total research and development expense for the three month periods ended May 31, 2010 was not significant.

Recent accounting pronouncements

In April 2009, the FASB issued three related staff positions to clarify the application of FASB ASC 820 to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair value of financial instruments in interim periods. The final staff positions are effective for interim and annual periods ending after June 15, 2009.
 
·  
FASB ASC 820 (Transitional 820-10-65-4)—which provides guidance on how to determine the fair value of assets and liabilities under FASB ASC 820 in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
 
·  
FASB ASC 320—which modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. It also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.
 
·  
FASB ASC 820-10-50—which requires disclosures of the fair value of financial instruments within the scope of FASB ASC 820 in interim financial statements, adding to the current requirement to make those disclosures in annual financial statements. The staff position also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period.

In June 2009, the Financial Accounting Standards Board (‘‘FASB’’) issued its final Statement of Financial Accounting Standards (‘‘SFAS’’) No. 168, ‘‘The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162’’ (‘‘SFAS No. 168’’). SFAS No. 168 established the FASB Accounting Standards Codification (‘‘ASC’’) as the single source of authoritative U.S. GAAP to be applied by nongovernmental entities in the preparation of financial statements. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance in the ASC carries an equal level of authority. The ASC supersedes all previously existing non-SEC accounting and reporting standards. The ASC simplifies user access to all authoritative U.S. GAAP by reorganizing previously issued U.S. GAAP pronouncements into approximately 90 accounting topics within a consistent structure, without creating new accounting and reporting guidance. The ASC became effective for financial statements issued for interim and annual periods ending after September 15, 2009; accordingly, we adopted the ASC in the third quarter of fiscal 2009. Following SFAS No. 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the ASC, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the ASC. For the discussion herein, we refer to ASC citations that relate to ASC Topics and their descriptive titles, as appropriate, and no longer refer to citations that relate to accounting pronouncements superseded by the ASC.

In June 2009, the FASB issued ASC 860, which eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. FASB ASC 860 will be effective for transfers of financial assets in fiscal years beginning after November 15, 2009 and in interim periods within those fiscal years with earlier adoption prohibited. The adoption of ASC 860 had no impact on the Company’s Consolidated Financial Statements.

 
-23-

 

In September 2009, the FASB issued new accounting guidance related to the revenue recognition of multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of 2011. Early adoption is allowed. The Company does not believe adoption of this guidance will have a material impact on its consolidated financial statements.

In January 2010, the FASB issued new accounting guidance related to the disclosure requirements for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements for related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. The Company does not believe the adoption of this guidance will have a material impact to the Company’s consolidated financial statements.

In August 2009, the FASB issued ASU 2009-05, which provides additional guidance under the Fair Value Measurements and Disclosures Topic, ASC 820-10 Application to Liabilities. The guidance clarifies that the quoted price for the liability when traded as an asset in an active market is a Level 1 measurement, when no adjustment to the quoted price is required. In the absence of a Level 1 (quoted price) measurement, an entity must use one or more valuation techniques to estimate fair value in a manner consistent with the principles in ASC 820. The Company does not expect adoption of this guidance to have an impact on the Company’s consolidated financial statements.

In October 2009, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements (Topic 605), or ASU 2009-13. ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of Accounting Standards Codification (ASC) Subtopic 605-25. The consensus in ASU 2009-13 provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management's estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. The present standard requires that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. In addition, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not believe this guidance will have a material impact on its financial position or results of operations.

In October 2009, the FASB issued ASU 2009-14 which amended the accounting requirements under the Software Topic, ASC 985-605 Revenue Recognition. The objective of this update is to address the accounting for revenue arrangements that contain tangible products and software. Specifically, products that contain software that is “more than incidental” to the product as a whole will be removed from the scope of ASC subtopic 985-605. The amendments align the accounting for these revenue transaction types with the amendments under ASU 2009-13 mentioned above. The guidance provided within ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010 and allows for either prospective or retrospective application, with early adoption permitted. The Company does not expect adoption of this guidance to have an impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued an ASU 2009-15 regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

Results of Operations

The following table sets forth the results of our operations for the periods indicated in dollars and as a percentage of revenues:

 
-24-

 

   
Three Months Ended May 31,
 
   
2010
   
2009
 
   
Dollars
   
%
   
Dollars
   
%
 
Revenues
   
243,785
     
100.0
%
   
230,087
     
100.0
%
Cost of sales
   
175,479
     
71.98
%
   
219,628
     
95.45
%
Gross profit
   
68,306
     
28.02
%
   
10,459
     
4.55
%
Selling, general and administrative expenses
   
685,398
     
281.15
%
   
906,901
     
394.16
%
                                 
Net operating income (loss)
   
(617,092
)
   
(253.13
)%
   
(896,442)
     
389.61
%
Interest expense
   
(696
)
   
(0.28
)%
   
(225)
     
0.10
%
Gain (loss) on exchange
   
(82)
     
(0.0)
%
   
(201)
     
0.09
%
Other income (expense)
   
3,431
     
1.41
%
   
0
     
0.0
%
Income tax
   
0
     
0.0
%
   
0
     
0.0
%
Net income (loss)
   
(614,439)
     
(252.04)
%
   
(896,844)
     
389.78
%

Revenues.  Revenues for the three months ended May 31, 2010 were $243,785, an increase of $13,699 or almost 6.0% from revenues of $230,087 for the three months ended May 31, 2009.   The increase in revenue reflects tehdevelopment and sale of competitive LED lighting products in Q1 2011 in the quarter ended May 31, 2010.

Gross Profit/ Gross Margin.   For the three months ended May 31, 2010 our gross margin increased from 4.6% to 28.0%.   Our gross profit for the three months ended May 31, 2010, was $68,306, compared with $10,459 for three months ended May 31, 2009.   The increase in gross margin reflects a change in the product mix with an increase in sales of LED lighting products and energy-saving solutions. LED lighting and energy-saving solutions have higher profit margins than GPS sale and information globalization services, which accounted for most of our revenue in the quarter ended May 31, 2009.

Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased from $906,901 in the quarter ended May 31, 2009 to $685,398 in the quarter ended May 31, 2010, a decrease of approximately 24.4%. This decrease reflects less expenses related to the company’s status as a publicly company.  During the quarter ended May 31, 2009, we incurred approximately $640,000 of general and administrative expenses relating to the reverse acquisition, which was completed in April 2009.  During the quarter ended May 31, 2010, we incurred general and administrative expenses of approximately $100,000 as a result of being a public company, which were primarily professional expenses.
 
Net Operating Loss. In the three months ended May 31 2010, our loss from operations amounted to ($617,092) as compared to a loss from operations of $896,442 for the comparable period in 2009, a decrease of approximately $279,350 or 31.2%.

Other Income. Other income was not material for the three month periods ended May 31, 2010 or 2009.

Net Loss. As a result of the foregoing, our net loss for the three month period ended May 31, 2010 was $614,439 or $(0.03) per share (basic and diluted), as compared net loss with $896,844, or $0.05 per share (basic and diluted) for the three month periods ended May 31, 2009.

Liquidity and Capital Resources:

The following table sets forth information as to the principal changes in the components of working capital from May 31, 2010 to February 28, 2010:
 
Category
 
May 31, 2010
   
February 28, 2010
   
Change (in $)
   
% Change
 
Current assets:
                       
Cash and cash equivalents
 
$
139,820
   
$
255,884
   
$
(116,064)
     
(45.4)
%
Restricted cash
   
26,713
       
-
   
26,713
     
100.0%
 
Notes receivable, net
   
3,020
     
21,088
     
(18,068
)
   
(85.7
)%
Accounts receivable, net
   
155,643
     
103,472
     
52,171
     
50.4
%
Other receivables
   
34,617
     
30,287
     
4,230
     
13.9%
 
Inventories
   
198,143
     
146,626
     
51,517
     
35.1
%
Prepayments
   
36,969
     
69,537
     
(32,568)
     
(46.8)
%
Other current assets
   
26,212
     
20,761
     
5,451
)
   
26.3
%
                                 
Current liabilities:
                               
Short-term debt
   
48,660
     
20,339
     
28,321
     
139.2
%
Notes payable
   
89,675
     
157,109
     
(67,434)
     
(42.9)%
 
Accounts payable
   
73,251
     
70,000
     
3,251
     
4.6
%
Other payable
   
450,450
     
556,163
     
(105,713)
     
(19.0)
 
Accrued liabilities
   
191,396
     
145,951
     
45,445
     
31.1
%
Due to related party
   
1,631,159
     
1,775,314
     
(144,155)
)
   
(8.1
)%
Other current liabilities
   
12,632
     
2,370
     
10,262
     
433.0
%
                                 
Total current assets
   
621,137
     
647,755
     
(26,618)
     
(4.1)
%
Total current liabilities
   
2,497,223
     
2,727,246
     
(230,024)
     
(8.4)
%
Working capital
   
(1,876,086)
     
(2,079,492
   
203,406
     
(9.8)
%
 
 
-25-

 

Our working capital deficiency decreased from a deficiency of $2,079,492 at February 28, 2010 to capital deficiency of $(1,876,086) at May 31, 2010.

We have financed our operations principally through the capital markets as well as loans from company officers and directors. During the three months ended May 31, 2010, the Company issued an aggregate of 1,134,823 shares of common stock at $0.71 per share to four investors for an aggregate sales price of $805,724.

We have also relied significantly on loans from our officers and directors.  As of May 31, 2010, we owed a total of approximately $1.6 million to related parties – our chief executive officer, one of our directors and the president of one of our subsidiaries.  The borrowings do not bear interest and are payable on demand.

During the three months ended May 31, 2010, we incurred net losses of approximately $614,000.  In addition, we had a negative cash flow in operating activities amounting approximately $629,000 in the three months ended May 31, 2010. These factors raise substantial doubt about our ability to continue as a going concern.  Management believes that actions presently being taken to obtain additional funding provide the opportunity to continue as a going concern. However, as a result of our losses of approximately $2.6 million for the year ended February 28, 2010 and $614,000 for the three months ended May 31, 2010, the need for usto restate prior year’s financial statements, the absence of financial controls, our low stock price and the absence of a strong market for our common stock, we may have difficulty raising additional funds in the equity market or from lenders.  The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern, which adjustments, if made, would be significant.

 Net cash flow used in operating activities was $629,096 in three months ended May 31, 2010 as compared to net cash flow used in operating activities of $192,241 in three months ended May 31, 2009, a decrease of $436,855. Net cash flow used in operating activities in the three months ended May 31, 2010 was mainly due to our net loss.  Net cash flow used in operating activities in the three months ended May 31, 2009 was mainly due to our net loss of $0.9 million, the increase in inventories of $0.1 million, and a increase in accounts payable of $0.1 million.

Net cash flow used in investing activities was $170,692 for the three months ended May 31, 2010 and $2,335 for the comparable period in 2009. For the three months ended May 31, 2010, the cash flow used in investing activity was primarily to purchase $129,105 in property and equipment.

Net cash flow provided by financing activities was $682,346 for the three months ended May 31, 2010. We received proceeds from issuance of shares at the amount of $805,724, and repayment of proceeds from related parties in the amount of $146,694. Net cash flow provided by financing activities was $246,249 for the three months ended May 31, 2009, which included proceeds from related parties at the amount of $163,550.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for smaller reporting companies.

ITEM 4.  CONTROLS AND PROCEDURES.

Our management, including Yao-ting Su, our chief executive and financial officer,evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2010.

 
-26-

 

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, our chief executive and financial officers concluded that because of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of May 31, 2010.

Management’s Report of Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act.  Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”).   Management assessed the effectiveness of our internal control over financial reporting as of May 31, 2010.  In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.  During our assessment of the effectiveness of internal control over financial reporting as of May 31, 2010, management identified material weaknesses related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and, and (iii) a lack of segregation of duties within accounting functions.

A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.

We became a reporting company in April 2009.  At the end of our most recent fiscal year, February 28, 2009, and until April 2009, when we completed the reverse acquisition, we were operating as three privately-owned companies whose operations were not consolidated for financial reporting purpose.  Our business is located in the Republic of China and our products are manufactured for us by third parties in the People’s Republic of China.  We began preparing to be in compliance with the internal control obligations, including Section 404, for our fiscal year ending February 28, 2009. During almost all of 2009 our internal accounting staff was primarily engaged in ensuring compliance with ROC accounting and reporting requirements for our operating affiliates and was not required to meet or apply U.S. GAAP requirements.  As a result, with the exception of certain additional persons hired at the end of 2009 to address these deficiencies, our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the ROC, management has determined that they require additional training and assistance in US GAAP matters.  Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.  Finally, management determined that the lack of an Audit Committee of the board of directors of the Company also contributed to insufficient oversight of our accounting and audit functions.

In order to correct the foregoing deficiencies, we are seeking to engage an experienced accountant or firm to assist us in establishing procedures that will enable us to have, on an ongoing basis, personnel who understand US GAAP and the disclosure obligations under the Securities Exchange Act. We are committed to the establishment of effective internal audit functions, however, due to the scarcity of qualified candidates with extensive experience in US GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit resources in order to enable us to have such procedures and controls established by the end of May 31, 2010.

At or about the completion of the reverse acquisition, we entered into agreements with consultants pursuant to which we issued equity securities for services rendered.  Subsequent to the reverse acquisition, we completed a financing in which we issued stock and warrants.  These events presented complex accounting issues which were new to our financial staff.  Furthermore, we do not have a large accounting department and it has been difficult for us to hire qualified personnel who understand English and Chinese and are familiar with both U.S. GAAP and Republic of China GAAP.  Additionally, from the completion of the reverse acquisition until January 2010, our chief financial officer was the wife of our chief executive officer.  Further, in the course of preparing our annual financial statements, we learned that we were not able to adequately document key accounting items, including our revenue and cost of revenue, resulting in the need to restate our financial statements for the year ended February 28, 2009 and each quarter of the year ended February 28, 2010, including the quarter ended May 31, 2009.  As originally reported, we showed net income of $724,000 on revenue of $1.2 million.  As restated, we reported a net loss of $897,000 on revenue of $230,000.  We are addressing these issues by reviewing and revising our internal accounting policies and procedures, expanding the resources allocated to our accounting department, and hiring outside accounting advisors.  We expect resolution of these matters may take several months.  Accordingly, based on the foregoing, the certifying officers have concluded that our disclosure controls and procedures are not effective at this time.

 
-27-

 

We also intend to elect additional directors, who will be independent and one of whom could serve as the audit committee financial expert. We believe that the appointment of such directors will strongly influence our management in establishing the necessary controls.

However, due to our size and nature, the segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

We believe that the foregoing steps will remediate the material weaknesses identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

This annual report does not include an attestation report of our registered accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

The conclusion of chief executive officer and chief financial officer regarding our disclosure controls and procedures is based solely on management’s conclusion that our internal control over financial reporting was not effective.

Our material weaknesses related to:

 
·
An insufficient complement of personnel in our corporate accounting and financial reporting function with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complex financial accounting and reporting requirements and materiality thresholds.
 
 
·
Lack of familiarity with the accounting treatment of the issuance of equity in consideration of services rendered and with the accounting aspects of reverse acquisition accounting.
 
 
·
Lack of internal audit function - the monitoring function of internal control is not well performed due to insufficient resources. In addition, the scope and effectiveness of internal audit function have yet to be developed.
  
 
·
Lack of written policies and procedures relating to periodic review of current policies and procedures and their implementation.
 
 
·
The absence of an audit committee comprised of independent directors.

Remediation and Changes in Internal Control over Financial Reporting

Our management has discussed the material weaknesses in its internal control over financial reporting with the board of directors, and we are in the process of developing and implementing remediation plans to address the material weaknesses. As an initial step, we engaged an independent accounting firm which is not related to our independent registered accounting firm, to assist us in the preparation of our financial statements and the development and implementation of a system of internal controls.

Other than as described above, management does not believe that there have been any other changes in our internal control over financial reporting, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

 
-28-

 

PART II - OTHER INFORMATION

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

On February 23, 2010, the Company issued 100,000 restricted shares of its common stock (approximately $45,000) to Prostep International Corp. for the services provided in connection with a trade show. The issuance of these securities was exempt from registration under Regulation S of the Securities and Exchange Commission under the Securities Act of 1933 (the “Securities Act”).  Prostep International Corp. is not a “U.S. person” as that term is defined in Rule 902(k) of Regulation S under the Securities Act, had acquired the common stock for investment purposes for its own respective account and not as a nominee or agent, and not with a view to the resale or distribution thereof, and understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.

ITEM 6.  EXHIBITS

a) Exhibit index

Exhibit    Description of the Exhibit

31.1         Rule 13a-14(a)/15d-14(a) certification by the chief executive and financial officer.

32.1         Section 1350 certification by the chief executive officer and financial officer.


 
-29-

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
    XODTEC LED, INC.  
       
Date: December 10, 2010    
 
/s/ Yao-Ting Su  
    Yao-Ting Su  
    Chief Executive Officer  
 
 
 
 
 
 
 
 -30-