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EX-32.1 - EXHIBIT 32.1 - SURGLINE INTERNATIONAL, INC.cnuv10q103110ex32_1.htm


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

FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2010
or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____to _____
 
Commission file number: 333-48746


CHINA NUVO SOLAR ENERGY, INC.
(Name of small business issuer as specified in its charter)

Nevada
87-0567853
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)

319 Clematis Street – Suite 703, West Palm Beach, Florida 33401
(Address of principal executive offices)(Zip Code)

Issuer's telephone number, including area code: (561) 514-9042



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 Days: [x]Yes  [ ]No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.

Large accelerated filer [ ]                                                      Accelerated filer [ ]
Non-accelerated filer [ ]                                                      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 [x]No

Number of shares of common stock outstanding at December 10, 2010 was 375,558,292.


 
 

 
 




TABLE OF CONTENTS

     
   
Page
 
PART I
 
Item 1.
Financial Statements
3-22
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27
Item 4T
Controls and Procedures
27
 
PART II
 
Item 1.
Legal Proceedings
28
Item 1A.
Risk Factors
28
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28
Item 3.
Defaults Upon Senior Securities
28
Item 4.
Submission of Matters to a Vote of Security Holders
28
Item 5.
Other Information
28
Item 6.
Exhibits
29
SIGNATURES
30


 
 
 

 
 
 CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY  
 (A Development Stage Company)  
 Consolidated Balance Sheets  
 
Assets
           
   
October 31, 2010
   
July 31, 2010
 
   
(Unaudited)
   
(Audited)
 
Current Assets
           
Cash
  $ 306     $ 404  
Notes and interest receivable, related parties
    36,276       36,276  
                 
Total current assets
    36,582       36,680  
                 
Debt issuance costs
    6,756       12,464  
                 
Total assets
  $ 43,338     $ 49,144  
                 
Liabilities and Shareholders’ Deficit
               
                 
Current liabilities:
               
Accrued liabilities, related parties
  $ 1,011,297     $ 970,170  
Accounts payable and accrued expenses
    283,039       259,145  
Derivative liability convertible debentures
    300,037       206,590  
Notes payable
    216,559       211,559  
Notes payable, related parties
    317,231       317,231  
                 
Total current liabilities
    2,128,163       1,964,695  
                 
Long-term liabilities:
               
Convertible debentures payable, net
    189,728       173,644  
                 
Total liabilities
    2,317,891       2,138,339  
                 
Shareholders’ deficit:
               
Preferred stock, $.001 par value; 25,000,000 shares authorized,
               
314,172 shares issued and outstanding
    314,172       314,172  
Common stock, $.001 par value, 1,475,000,000 shares authorized;
               
375,558,301 issued and outstanding
    375,558       375,558  
Minority interest
    (141,393 )     (140,724 )
Deferred compensation
    -        
Additional paid-in capital
    8,821,369       8,821,369  
Retained earnings
    (11,644,259 )     (11,459,569 )
                 
Total shareholders' deficit
    (2,274,553 )     (2,089,195 )
                 
Total liabilities and shareholders' deficit
  $ 43,338     $ 49,144  
 
See accoompanying notes to financial statements.
 
 
3

 
 
 
CHINA NUVO SOLAR ENERY, INC. AND SUBSIDIARY
 
(A Development Stage Company)
 
 Consolidated Statement of Operations
 
For the Three Months Ended October 31, 2010 and 2009
 
                   
               
From Inception
 
               
April 16, 2006-
 
   
2010
   
2009
   
October 31, 2010
 
                   
Revenues:
                 
Revenues
  $ -     $ -     $ 9,766  
Cost of revenues
    -       -          
                         
Gross profit
    -       -       9,766  
                         
Operating costs and expenses:
                       
Selling, general and administrative
                       
Bonus, related party
            -       275,561  
Consulting fees
    -       -       331,859  
Management and consulting fees, related parties
    39,000       48,000       750,000  
Salaries including stock compensation cost
    -       106,094       853,626  
Legal and accounting
    15,000       8,070       254,420  
  Other
    98       16,001       340,756  
                         
Total operating costs and expenses
    54,098       178,165       2,806,222  
                         
                         
Operating loss
    (54,098 )     (178,165 )     (2,796,456 )
                         
Other income (expenses)
                       
Interest expense, related parties
    (7,610 )     (6,723 )     (96,483 )
Interest expense, other
    (30,203 )     (61,381 )     (873,149 )
Interest income, related parties
    -       147       4,779  
Minority interest
    669       366       141,393  
Write off intellectual property
    -               (333,403 )
Loss on investmet in subsidiary
    -               (8,000,000 )
Fair value adjustment of derivative liabilities
    (93,447 )     164,444       319,121  
                         
Total other income (expenses)
    (130,591 )     96,853       (8,837,742 )
                         
                         
Net loss
  $ (184,689 )   $ (81,312 )   $ (11,634,198 )
                         
                         
Basic and diluted net loss per common share **     (0.01 )     (0.01 )        
                         
Basic and diluted weighted average common
                       
 shares outstanding
    375,558,292       291,803,022          
                         
**Less than $.01
                       
 
See accoompanying notes to financial statements.
 
 
4

 
 
 CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY  
(A Development Stage Company)  
 Consolidated Statement of Changes in Shareholders' Deficit  
   
               
Additional
                           
Total
 
   
Common stock
   
paid-in
   
Deferred
               
Accumulated
   
stockholders'
 
   
Shares
   
Amount
   
capital
   
compensation
   
Minority interest
   
Preferred stock
   
(deficit) equity
   
deficit
 
   
 
   
 
   
 
                     
 
   
 
 
Balance at August 1, 2008
    204,676,437     $ 204,676     $ 8,071,460     $ (133,333 )   $ (61,286 )   $ 535,891     $ (9,900,458 )   $ (1,283,050 )
                                                                 
Issuance of shares upon conversion of subordinated debentures
    41,904,256       41,904       142,732                                       184,636  
                                                                 
Issuance of shares upon conversion of notes payable, related and
                                                               
accrued interest payable, related
    15,385,470       15,385       61,119                                       76,504  
                                                                 
Amortization of deferred compensation
                    0       133,333                               133,333  
                                                                 
Issuance of shares pursuant to conversion of accounts payable
    1,287,692       1,288       6,087                                       7,375  
                                                                 
Issuance of common stock upon mandatory conversion of
                                                       
preferred stock
    21,697,324       21,697       76,953                       (98,650 )             0  
                                                                 
Minority interest
                                    (74,402 )                     (74,402 )
                                                                 
Net loss
                                                    (787,050 )     (787,050 )
                                                                 
Balances, July 31, 2009
    284,951,179       284,951       8,358,351       -       (135,688 )     437,241       (10,687,508 )     (1,742,653 )
                                                                 
Issuance of shares upon conversion of subordinated debentures
    34,666,667       34,667       295,889                                       330,556  
                                                                 
Warrants issued for services
                    100,000                                       100,000  
                                                                 
Issuance of common stock upon mandatory conversion of
                                                       
preferred stock
    55,940,455       55,940       67,129                       (123,069 )             0  
                                                                 
Minority interest
                                    (5,036 )                     (5,036 )
                                                                 
Net loss
                                                    (772,061 )     (772,061 )
                                                                 
Balances July 31, 2010
    375,558,301       375,558       8,821,369       -       (140,724 )     314,172       (11,459,569 )     (2,089,194 )
                                                                 
Minority interest
                                    (669 )                     (669 )
                                                                 
Net loss
                                                    (184,689 )     (184,689 )
                                                                 
Balances July 31, 2010
    375,558,301     $ 375,558     $ 8,821,369       -     $ (141,393 )   $ 314,172     $ (11,644,259 )   $ (2,274,553 )
 
See accoompanying notes to financial statements.
 
 
5

 
 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
 
(A Development Stage Company)
 
ConsolidatedStatement of Cash Flows
 
For the Three Months Ended October 31, 2010 and 2009
 
                   
   
 
         
From Inception
 
               
April 16, 2006-
 
   
2010
   
2009
   
October 31, 2010
 
                   
Cash flows from operating activities:
                 
Net income (loss)
  $ (184,689 )   $ (81,312 )   $ (11,644,259 )
                         
Adjustments to reconcile net income (loss)
                       
to net cash used in operating activities:
                       
Net liabilities acquired
                    6,755,316  
Loss on impairment
    -               333,403  
Decrease in derivative liability
    93,447       (164,444 )     (339,062 )
Change in minority interest
    (669 )     (366 )     (141,393 )
Amortization of discount on debentures payable
    16,084       46,717       634,578  
Amortization of debt issuance costs
    5,708       5,708       104,018  
Common stock and warrant based compensation
    -       106,094       853,626  
Depreciation
    -       586       5,478  
Amortization of intellectual property
    -       6,583       106,498  
Change in operating assets and liabilities:
                       
Decrease (increase)  in prepaid expenses and other current assets
    -       -       0  
(Increase) in notes and interest receivable
    -       -       (4,632 )
Increase in accounts payable and accrued expenses
    23,895       8,482       593,446  
Increase in amounts due to related parties
    41,127       28,324       1,264,243  
Net cash used in operating activities
    (5,098 )     (43,628 )     (1,478,740 )
                         
                         
Cash flows from investing activities:
                       
Purchase of property and equipment
    -       -       (293,401 )
                         
Net cash used in investing activities
    -       -       (293,401 )
                         
                         
Cash flows from financing activities:
                       
Proceeds from sale of common stock
    -               687,500  
Proceeds from issuance of related party notes payable
    5,000       1,200       455,485  
Proceeds from debentures payable
    -       -       505,000  
Proceeds from sale of subsidiary common stock
                    50,000  
Proceeds from payments received on notes receivable, related parties
    -       -       19,848  
Placement fees paid
    -       -       (75,650 )
Proceeds from advances and loans
    -       50,035       583,640  
Payment of related party notes payable
    -       (7,550 )     (207,727 )
Payment to related party for notes receivable
    -       -       (23,800 )
Payment of notes payable
    -       -       (221,839 )
Increase in bank overdraft
    -       8       (9 )
Net cash provided by financing activities
    5,000       43,693       1,772,448  
                         
                         
Net increase (decrease) in cash and cash equivalents
    (98 )     65       306  
 
(Continued)
 
 
6

 
 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
 
(A Development Stage Company)
 
Consolidated Statement of Cash Flows (Continued)
 
For the Three Months Ended October 31, 2010 and 2009
 
                   
               
From Inception
 
   
 
         
April 16, 2006-
 
   
2010
   
2009
   
April 30, 2010
 
                   
Cash and cash equivalents, beginning of period
    404       304       -  
                         
Cash and cash equivalents, end of period
  $ 306     $ 369     $ 306  
                         
                         
Supplemental disclosures of cash flow information:
            -          
Cash paid during the year for interest
  $ -     $ 988     $ 100,220  
Cash paid during the year for taxes
  $ -     $ -     $ -  
                         
Non-cash investing and financial activities:
                       
Fair value of options and shares issued for notes payable,
                       
subordinated debentures and services
  $ -     $ 65,000     $ 3,252,055  
Fair value of subsidiary common stock issued for notes and
                 
interest payable
  $ -     $ -     $ 300,023  
Common stock issued in connection with merger
                  $ 133,333  
 
See accoompanying notes to financial statements.
 
 
7

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




1.
Basis of presentation and summary of significant accounting policies:

Basis of presentation

       The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of China Nuvo Solar Energy, Inc. (the “Company”) contain all adjustments, which include normal recurring adjustments necessary to present fairly the financial position at October 31, 2010, the results of operations for the three months ended October 31, 2010 and 2009 and cash flows for the three months ended October 31, 2010 and 2009.  The balance sheet as of July 31, 2010 is derived from the Company’s audited financial statements.

        The consolidated financial statements for the three months ending October 31, 2010 and 2009 include the accounts of the Company and our majority owned subsidiary Interactive Entertainment Group, Inc, (f/k/a/ Interactive Games, Inc.) a Florida Corporation (“IGAM”) and our wholly owned subsidiary Nuvo Solar Energy, Inc. (“Nuvo”).  All of the intercompany accounts have been eliminated in consolidation.  Certain reclassifications to amounts reported in the July 31, 2010 consolidated financial statements have been made to conform to the October 31, 2010 presentation.

       Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading.  For further information, refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2010, as filed with the SEC.

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period.  Actual results could differ from those estimates.

        The results of operations for the three months ended October 31, 2010 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending July 31, 2011.

        Pursuant to an Agreement and Plan of Reorganization dated as of April 23, 2007, as amended on July 25, 2007 (the “Share Exchange”), by and between the Company and Nuvo Solar Energy, Inc., a Colorado corporation (“Nuvo”) incorporated on April 13, 2006, we and Nuvo entered into a share exchange whereby all of the issued and outstanding capital stock of Nuvo, on a fully-diluted basis, was exchanged for like securities of the Company, and whereby Nuvo became our wholly owned subsidiary (the “Share Exchange”).  The Share Exchange was effective as of July 25, 2007, upon the completed filing of Articles of Exchange with the Nevada Secretary of State and a Statement of Share Exchange with the Colorado Secretary of State.  Contemporaneously with the Share Exchange, we changed our name to “China Nuvo Solar Energy, Inc.”

       Immediately prior to the effective time of the Share Exchange, Nuvo had outstanding 5,500,000 shares of its common stock (“Nuvo Common Stock”) and no shares of preferred stock.  In accordance with the Share Exchange Agreement, each share of Nuvo Common Stock was acquired by us in exchange for approximately 24.24 shares of our common stock for a total of 133,333,255 shares issued.  Accordingly, after giving effect to the Share Exchange, the Company

 
8

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




1.
Basis of presentation and summary of significant accounting policies (continued):

Basis of presentation (continued):

had approximately 189,915,355 shares of Common Stock outstanding immediately following the transaction.  The shares issued were valued at approximately $8 million or $.06 per share (the market price of the common stock on the date of issuance).  The Company allocated the value of the shares to goodwill as the fair value of the liabilities assumed exceeded the fair value of the assets acquired. Management has determined that as of July 31, 2007 the goodwill amount of $8 million was impaired and recorded the write down of goodwill for the year ending July 31, 2007.

       As a result of the Share Exchange, the former Nuvo shareholders together held approximately 66.6% of the Company’s outstanding common stock immediately following the transaction, on a fully-diluted basis.  Accordingly, the Share Exchange constituted a change of control of the Company.  As a result of the Share Exchange, Nuvo constituted the accounting acquirer in the Share Exchange; however, we elected to have a July 31 fiscal year end, which is the same fiscal year end that Interactive Games, Inc. had prior to the Share Exchange.

       Nuvo was formed on April 13, 2006 for the purpose of seeking a business opportunity in the alternate energy or “next-generation energy" sector. This industry sector encompasses non-hydro carbon based energy production and renewable energy technologies that are “net-zero" or emissions free.

Going concern and management’s plans

The Company had a working capital deficit of approximately $2,102,000 and $2,281,000 at July 31, 2010 and October 31, 2010, respectively. Additionally, the Company to date has generated minimal revenues. Accordingly, the Company has no ready source of working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. While management believes the Company may be able to raise funds through the issuance of debt or equity instruments, there is no assurance the Company will be able to raise sufficient funds to operate in the future.

         We will require additional capital to fund the development of our technology as well as for general corporate working capital to fund our day-to-day operations and costs associated with being a publicly-traded company.  This amount does not include any amounts which may be necessary to pay off existing debt or accrued expenses.  We presently believe the source of funds will primarily consist of debt financing, which may include debt instruments that may include loans from our officers or directors, or the sale of our equity securities in private placements or other equity offerings or instruments.

         Although our balance sheet includes current liabilities of $2,317,891, a portion of this amount are in the form of a derivative liability of $300,037 and convertible notes of $100,000.  These amounts, plus any accrued and unpaid interest, may be converted to common stock, thereby reducing our debt service obligations.  Nevertheless, we will be required to raise funds in order to fund our operations and costs associated with being a publicly traded company.

 
9

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




1.
Basis of presentation and summary of significant accounting policies (continued):

Going concern and management’s plans (continued)

         Over the next twelve months management will be re-examining its business plan. We do not intend to enter into any additional direct development of our technology.  Rather, we plan to become an incubator of the solar technology we currently own and technology that we may acquire in the future. We currently do not have any agreements to acquire any additional technology.  In order to acquire additional technology we would either have to raise additional money through equity or debt financing or in the alternative issue shares of our common stock. We intend to study the feasibility of sub-licensing or entering into other types of agreements with third parties, whereby the third party will compensate us by paying a license fee and subsequent royalties.  The compensation may be in the form of cash or in the licensee’s common stock.  Through our established relationships we plan to focus on the identification, acquisition and potential license or resale of renewable and alternative energy technologies.

 
Description of business

       DEVELOPMENT STAGE COMPANY

       The Company has earned limited revenues from operations.  Accordingly, the Company's activities have been accounted for as those of a "Development Stage Company" as set forth by the Financial Accounting Standards Board Statement. Among the disclosures required are that the Company's financial statements be identified as those of a development stage company, and that the statements of operations, stockholders' equity and cash flows disclose activity since the date of the Company's inception.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results will differ from those estimates.

Intellectual property

      The Company records intangible assets in accordance with ASC 350, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets deemed to have indefinite lives are not subject to annual amortization. Intangible assets which have finite lives are amortized on a straight line basis over their remaining useful life; they are also subject to annual impairment reviews.

Long-lived assets and certain identifiable intangibles

Long-lived assets, such as property and equipment and definite-lived intangible assets are stated at cost or fair value for impaired assets.  Depreciation and amortization is computed principally by the straight line method for financial reporting purposes.

Asset impairment charges are recorded for long-lived assets and intangible assets subject to amortization when events and circumstances indicate that such assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying value of the assets exceeds its fair value.  Fair value is determined using appraisals, management estimates or discounted cash flow calculations.

 
10

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




1.
Basis of presentation and summary of significant accounting policies (continued):

Summary of significant accounting policies:

Revenue recognition

The Company recognizes revenue in accordance with ASC 605, “Revenue Recognition in Financial Statements”.  This statement established that revenue can be recognized when persuasive evidence of an arrangement exists, the services have been delivered, all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is reasonably assured.

Cash and cash equivalents

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

Concentration on credit risks

The Company is subject to concentrations of credit risk primarily from cash.  The Company minimizes its credit risks associated with cash, by periodically evaluating the credit quality of its primary financial institutions.

Stock-based compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). As required by ASC 718, the Company will recognize the cost resulting from all stock-based payment transactions including shares issued under its stock option plans in the financial statements. There are 17,500,000 stock options and warrants outstanding as of October 31, 2010.

Fair value of financial instruments

The carrying value of cash, accounts payable and accrued expenses approximate their fair value due to their short-term maturities. The carrying amount of the note payable and due to related parties approximate their fair value based on the Company's incremental borrowing rate.

Income taxes

Income taxes are accounted for in accordance with ACS 740, Accounting for Income Taxes. ACS 740 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some, or all, of the deferred tax asset will not be realized.

 
11

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




1.     Basis of presentation and summary of significant accounting policies (continued):
 
Summary of significant accounting policies (continued):

Loss per common share
 
Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period.  Stock options, warrants and common stock underlying convertible promissory  notes at October 31, 2010 and 2009 were 271,653,642 and 178,869,040, respectively, are not considered in the calculation as the impact of the potential common shares would be to decrease loss per share and therefore no diluted loss per share figures are presented.

Accounting for obligations and instruments potentially settled in the Company’s common stock

The adoption of this guidance did not have a material impact on our consolidated financial statements.
 
All contracts are initially measured at fair value and subsequently accounted for based on the then current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification of a contract is reassessed at each balance sheet date.

Derivative instruments

In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative instruments under the provisions ACS 815, Accounting for Derivative Instruments and Hedging Activities.

 
Recent accounting pronouncements

In May 2009, ASC 855 “Subsequent Events” was issued.  ASC 855 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or available to be issued.  In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. ASC 855 has not had a material effect on its consolidated financial statements.

In June 2009, the FASB issued ASC Topic 810 “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140.  ASC Topic 810 requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. ASC Topic 810 must be applied as of the beginning of each reporting entity’s first annual reporting

 
12

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




1.     Basis of presentation and summary of significant accounting policies (continued):
 
Summary of significant accounting policies (continued):

Recent accounting pronouncements (continued)

period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  This Statement must be applied to transfers occurring on or after the effective date. The adoption of ASC Topic 810 did not have a material impact on the financial statements.

In June 2009, the FASB issued ASC Topic 810 “Amendments to FASB Interpretation No. 46(R)”.  ASC Topic 810 requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance.  It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity.  ASC Topic 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  The Company does not expect ASC Topic 810 to have a material effect on its financial statements.

In June 2009, the FASB issued ASC Topic 105 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162”.  The FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.  Following SFAS 168, the Board 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.  This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative.  

In  October  2009,  the  FASB  issued ASU 2009-13, "Multiple-Deliverable Revenue Arrangements",  now  codified  under  FASB ASC Topic 605, "Revenue Recognition", ("ASU  2009-13").  ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-13 should be applied on a prospective basis for revenue  arrangements  entered  into  or  materially  modified  in  fiscal years beginning  on  or after June 15, 2010, with early adoption permitted and is not expected  to  have  a  significant impact on the Company's financial statements.

In October, 2009, the FASB issued ASU 2009-15, "Accounting for Own-Share Lending Arrangements  in Contemplation of Convertible Debt Issuance or Other Financing", now  codified  under  FASB  ASC  Topic 470 "Debt", ("ASU 2009-15"), and provides guidance  for accounting and reporting for own-share lending arrangements issued in  contemplation  of  a  convertible  debt issuance. At the date of issuance, a share-lending  arrangement  entered  into  on  an  entity's own shares should be measured  at  fair  value  in  accordance  with  Topic  820 and recognized as an issuance  cost,  with an offset to additional paid-in capital. Loaned shares are excluded  from  basic  and  diluted  earnings  per  share  unless default of the share-lending

 
13

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




1.
Basis of presentation and summary of significant accounting policies (continued):

 
Summary of significant accounting policies (continued):

 
Recent accounting pronouncements (continued):

arrangement  occurs.  The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are  dependent  upon the date the share-lending arrangement was entered into and include  retrospective  application  for  arrangements  outstanding  as  of  the beginning of fiscal years beginning on or after December 15, 2009. Management is currently evaluating the potential impact of ASU 2009-15 on our financial statements.

In December, 2009, FASB issued ASC Topic 860, "Transfers and Servicing." New authoritative  accounting  guidance  under  ASC  Topic  860,  "Transfers  and Servicing,"  amends  prior  accounting  guidance  to  enhance  reporting  about transfers  of  financial  assets, including securitizations, and where companies have  continuing  exposure to the risks related to transferred financial assets. The  new  authoritative  accounting  guidance  eliminates  the  concept  of  a "qualifying  special-purpose  entity"  and  changes  the  requirements  for derecognizing  financial  assets. The new authoritative accounting guidance also requires  additional  disclosures  about  all  continuing  involvements  with transferred  financial  assets  including  information  about  gains  and losses resulting  from  transfers  during  the period. The new authoritative accounting guidance  under  ASC  Topic  860  will  be  effective January 1, 2010 and is not expected  to  have  a  significant impact on the Company's financial statements.

The Company does not believe that any other recently issued, but not yet effective, accounting standards will have a material will have an effect on the Company’s consolidated financial position, results of operations or cash flow.

2.
Notes and interest receivable, related parties:

Notes and interest receivable, related parties at October 31, 2010 and July 31, 2010 are as follows:

   
October
   
July
 
             
Due from VP Development
  $ 31,300     $ 31,300  
Due from E2000, Inc.
    2,500       2,500  
Interest on above amounts
    2,476       2,476  
                 
    $ 36,276     $ 36,276  

Each of the above listed related parties is a related party to the Company through common control.

3.
Accrued liabilities, related parties:

 
Accrued liabilities, related parties at October 31, 2010 and July 31, 2010 are as follows:

 
14

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




3.
Accrued liabilities, related parties (continued):

   
October
   
July
 
             
Officer bonus
  $ 275,561     $ 275,561  
Management fees
    673,154       633,650  
Accrued interest
    62,582       60,959  
                 
    $ 1,011,297     $ 970,170  

 
4.   Fair Value Measurements:

In connection with any obligations and instruments potentially to be settled in the Company's stock, the Company accounts for the instruments in accordance with ASC 820, Fair Value Measurements and Disclosure. The guidance defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs. The guidance describes a fair value hierarchy utilizing three levels of input. The first two levels are considered observable and the third, unobservable:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Inputs other than Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities or quoted prices in markets which are not active. The inputs are generally observable or can be corroborated in observable markets.
 
Level 3 – Unobservable inputs where there is little or no market activity to support valuation.

5.
Convertible debentures payable:

On October 21, 2007 the Board of Director of the Company authorized the sale of up to $700,000 of 6% unsecured convertible debentures (the “2007 Debentures”).  During the year ended July 31, 2008, the Company executed a Securities Purchase Agreement with various accredited investors, whereby the Company sold in the aggregate $505,000 of the 2007 Debentures.  We received net proceeds of $429,350 after $75,650 of debt issuance costs (included in the balance sheet), paid to Divine Capital Markets, LLC (“Divine”), who acted as our placement agent.  The debt issuance costs have been amortized as debt issuance costs over the three year term of the 2007 Debentures.  Fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 2007 Debentures.  The change in the fair value of the liability will be credited or (charged) to other income or (expense) in the consolidated statement of operations.  

.   The Debentures are due three years from the final Closing Date under the Purchase Agreement (the “Maturity Date”), unless prepayment of the Debentures is required in certain events, as described below.  The Debentures are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 75% of the lowest closing bid price
per share (as reported by Bloomberg, LP) of the Corporation’s common stock for the twenty (20)trading days immediately preceding the date of conversion.  In addition, the Debentures provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Corporation or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Corporation.

 
15

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




5.     Convertible debentures payable (continued):

The outstanding principal balance of each Debenture bears interest, in arrears, at six percent (6%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in shares of our common stock at the Conversion Price.  Upon the occurrence of an Event of Default (as defined in the Purchase Agreement), then the Corporation is required to pay interest to the Holder of each outstanding Debenture, at the option of the Holders (i) at the rate of lesser of eighteen percent (18%) per annum and the maximum interest rate allowance under applicable law, and (ii) the Holders may at their option declare the Debentures, together with all accrued and unpaid interest (the “Acceleration Amount”), to be immediately due and payable.

The Corporation may at its option call for redemption all or part of the Debentures prior to the Maturity Date, as follows:

The Debentures called for redemption shall be redeemable for an amount (the “Redemption Price”) equal to (x) if called for redemption prior to the date which is nine months from the date of issuance (the “Issuance Date”), 115%, if called for redemption on or after the date that is nine months after the Issuance Date but prior to the first anniversary of the Issuance Date, 131%, in either case of the principal amount called for redemption, plus (y) interest accrued through the day immediately preceding the date of redemption.
 
(i)  
If fewer than all outstanding Debentures are to be redeemed, then all Debentures shall be partially redeemed on a pro rata basis.

In connection with the Purchase Agreement, the Company entered into a Registration Rights Agreement, dated as of October 31, 2007 (“Registration Rights Agreement”), with the Holders of the Debentures to provide certain registration rights under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations thereunder.  Pursuant to the Registration Rights Agreement, the Company contemplates making an offering of common stock (or other equity securities convertible into or exchangeable for common stock) registered for sale under the Securities Act or proposes to file a Registration Statement covering any of its securities other than (i) a registration of Form S-8 or S-4, or any successor or similar forms; and (ii) a shelf registration under Rule 415 for the sole purpose of registering shares to be issued in connection with the acquisition of assets, the Company will at each such time give prompt written notice to the Holders’ representative and the Holders of its intention to do so.  Upon the written request of any Holder made within thirty (30) days after the receipt of any such notice, the Company has agreed to use its best efforts to effect the registration of all such registrable securities which the Company has been so requested to register by the Holders, to the extent requisite to permit the disposition by the requesting Holders of their registrable securities pursuant to the Registration Statement.

The Company determined that the conversion feature of the 2007 Debentures represents an embedded derivative since the 2007 Debentures are convertible into a variable number of shares upon conversion. Accordingly, the convertible Debentures are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The Company believes that the aforementioned embedded derivatives and freestanding warrants meet the criteria of SFAS 133 and EITF 00-19, and should be accounted separately as derivatives with a corresponding value recorded as a liability. Accordingly, the fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 2007 Debentures. Such discount will be accreted from the date of issuance to the maturity date of the 2007 Debentures. The change in the fair value of the liability for derivative contracts will be credited to other income (expense) in the consolidated statements of operations. The

 
16

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




5.
Convertible debentures payable (continued):

$505,000 face amount of the 2007 Debentures were stripped of their conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds to the conversion option would be attributed to the debt. The beneficial conversion feature (an embedded derivative) included in the 2007 Debenture resulted in an initial debt discount of $505,000 and an initial loss on the valuation of derivative liabilities of $210,878. Based on the revaluation of the 2007 Debentures at October 31, 2010, the Company recorded an expense of $93,447 and decreased the derivative liability on the balance sheet by $93,447 for the three months ended October 31, 2010.

The Company issued 1,500,000 shares of its common stock to Divine and/or its designees as consideration for its services as the placement agent in connection with the financing transaction described above.

The following table summarizes the balance sheet amounts as of October 31, 2010, as well as the amounts included in the consolidated statement of operations for the three months ended October 31, 2010.

 
Balance Sheet

Debentures
 
Debt issuance costs
 
Derivative liability
 
Face value of Debentures
 
Discount on Debentures
                 
2007
 
$     6,756
 
$    300,037
 
$    205,000
 
$     15,272

Operating Statement
         
Debentures
 
Debt issuance costs (interest expense)
 
Increase in derivative liability
         
2007
 
    $     5,708
 
$         93,447
         
 
 
The initial beneficial conversion feature (embedded derivative) was calculated as if the debentures were converted on their initial issue date per the terms of the Purchase Agreement.  Those terms allowed for a conversion price equal to 75% of the lowest closing bid price per share as reported by Bloomberg, L.P. of the Company’s common stock for the twenty days immediately preceding the date of conversion.

The following amounts were recorded for the 2007 debentures:

 
1
2
3
4
5
6
A)
10/28/07
12/10/07
1/8/08
2/8/08
4/30/08
6/10/08
B)
$240,000
$80,000
$50,000
$55,000
$40,000
$40,000
C)
$0.08
$0.165
$0.115
$0.11
$0.04
$0.02
D)
$0.07
$0.068
$0.115
$0.1025
$0.04
$0.015
E)
$0.0525
$0.051
$0.08625
$0.076875
$0.03
$0.01125
F)
4,571,429
1,568,627
579,710
715,447
1,333,333
3,555,556
G)
$0.056
$0.145
$0.095
$0.087
$0.033
$0.02
H)
$256,000
$227,451
$55,072
$62,244
$44,000
$71,111

 
The initial total derivative liability recorded was $715,878.

 
17

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




6.
Convertible and other promissory notes and long-term debt, including related parties:

Convertible and other promissory notes and long-term debt, including related parties at October 31, 2010 and July 31, 2010 consist of the following:

   
October
   
July
 
             
Notes payable
  $ 216,559     $ 211,559  
Notes payable, related parties [A]
    317,231       317,231  
Convertible debentures, net of discount of $15,272 (October) and $31,356 (July)
    189,728       173,644  
    $ 723,518     $ 702,434  
                 
Less current portion
    533,790       528,790  
                 
Long-term debt, net of current portion
  $ 189,728     $ 173,644  

[A]
The following table summarizes the activity of notes payable, related parties for the nine months ended October 31, 2010:

Balance, August 1, 2010
  $ 317,231  
         
Issuance of new notes
    -  
Repayment of notes
    -  
         
Balance, October 31, 2010
  $ 317,231  

7.
Stockholders’ deficit:

      Stock options and warrants

      In March 2002, the Company adopted the 2002 Stock Option Plan, covering up to 1,000,000 shares of the Company's common stock, and in July 2003, the Company adopted the 2003 Stock Option Plan covering up to 2,500,000 shares of the Company's common stock. There are currently no options outstanding under the 2002 stock Option Plan and 300,000 under the 2003 Stock Option Plans. In August 2007, the Company adopted the 2007 Stock Option Plan covering up to 18,000,000 shares of the Company’s common stock. On August 10, 2009 the Company granted options to purchase 10,000,000 shares of the Company’s common stock under the 2007 Plan. The options have an exercise price of $0.01 (the market price of the common stock on the date of the grant) and expire in August 2019.  The options were valued at $100,000 based upon the Black-Scholes option pricing model. As of October 31, 2010 there were options to purchase 16,500,000 shares of the Company’s common stock outstanding under the 2007 Stock Option Plan.

 
A summary of the activity of the Company’s outstanding options and warrants during the three months ended October 31, 2010 is as follows:

 
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CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




7.
Stockholders’ deficit (continued):

      Stock options and warrants (continued)

 
 
Options and warrants
 
Weighted average exercise price
         
Outstanding, August 1, 2010
 
18,225,000
 
$     0.04
  Granted
 
-
 
-
  Exercised
 
-
 
-
  Expired
 
725,000
 
0.08
  Outstanding and exercisable at
       
  October 31, 2010
 
17,500,000
 
    $     0.04
         

Range of exercise prices
Warrants outstanding and exercisable
Weighted average remaining contractual life
Weighted average exercise price
       
$.01
10,000,000
5.02
$0.01
0.07
6,500,000
2.63
0.07
0.12
1,000,000
0.06
0.12

 
 
 
The weighted average remaining contractual life of the terms of the warrants and options is 7.1 years.

 
Minority Interest

In December 2007, the Financial Accounting Standards Board (FASB) issued new guidance which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income (loss) attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance requires that the noncontrolling interest continue to be attributed its share of losses even if that attribution results in a deficit.
 

Utilizing this guidance we classify the noncontrolling interest in IGAM in stockholders’ equity on our Consolidated Balance Sheets on a retrospective basis. In addition, consolidated net loss has been adjusted to include the net loss attributed to the noncontrolling interest in IGAM.

8.
Agreements:

On June 9, 2006 Nuvo signed a license agreement with Photovoltaics.com, Inc. (“PV”), Hutchinson Island, Florida.  Nuvo acquired exclusive worldwide rights to PV's solar cell technology relating to a multiple stacked solar cell using wave guide transfers (the “Solar Technology”). This license agreement includes all patents issued pursuant to certain patent applications or amendments that have been filed and the rights to use all applicable copyrights, trademarks and related intellectual property obtained on or in connection with the process and products. As consideration for this license, Nuvo paid a total aggregate license fee of $250,000.   The term of the license is for 10 years, automatically renewable for successive ten year terms

 
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CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




8.
Agreements (continued):

under the same terms and conditions as provided for in this agreement. As of July 31, 2010 the Company has been unable to commercialize the license and management believes the asset has been permanently impaired and accordingly has expensed the remaining $145,834 of the intellectual property acquired, and such amount is included in other expenses for the year ended July 31, 2010. Nuvo also agreed to pay PV a fee of $180,000 over the first three years of the agreement to act as a consultant.

     On January 23, 2008, the Company purchased from PV the patents related to the solar technology in exchange for 2,000,000 restricted shares of common stock of the Company.  The Company now owns all rights, title and interest in the patents, including all issued patents or other intellectual property arising from the patents worldwide.  The Company valued the common stock at $0.075 per share (the market price of the common stock on November 16, 2007, the date the parties agreed to the number of shares to be issued) and initially, increased its intellectual property by $150,000 and is included on the balance sheet included herein. As of July 31, 2010 the Company reviewed this asset and as part of the review determined that since the Company has not been able to commercialize the technology and is currently not pursuing the commercialization of the technology that the asset has been permanently impaired. Accordingly, the Company has recorded an impairment expense of $150,000, included in other expenses for the year ended July 31, 2010.

       On November 27, 2007, we executed a Collaboration and Development Agreement (the “Collaboration Agreement”) with Pioneer Materials, Inc. (“PMI”) of Torrance, California. Under the terms of the Agreement, PMI will build, equip, operate and manage, for our benefit, a product development, testing and prototype manufacturing facility in PMI’s Chengdu, Sichuan, China facility located in Chengdu’s West High Tech development zone.  The agreement with PMI has the objective to develop, test and manufacture prototypes of solar energy products using our licensed technology based on an invention titled “Photovoltaic cell with integral light transmitting waveguide in a ceramic sleeve”.

Additionally, PMI will provide technical, engineering development, testing and manufacturing employees and support staff.  The term of the Agreement is for one year, with automatic six-month renewal periods unless terminated by the parties.  Pursuant to the terms of the Agreement, the Company will pay PMI $2,500 per month and PMI is eligible to receive up to 4,000,000 shares of the Company’s common stock upon the satisfactory completion of certain milestone accomplishments in the Agreement, of which 500,000 shares of common stock were issued upon the execution of the Agreement.  The Company valued the shares at $0.07 per share (the market price of the common stock on the date the parties agreed to the number of shares to be issued) and recorded $35,000 as deferred stock compensation.  PMI is a manufacturer and supplier of materials for the semiconductor, hard drive media, optical media and photonic industries.  PMI is developing for the solar energy industry advanced materials for thin film photovoltaics (solar cell) processing.  In May of 2008, the Chengdu region of China experienced a catastrophic earthquake.  As a result of this earthquake and the after effects including significant problems with the delivery of electricity, PMI suspended their development work for a significant period of time.  We are no longer continuing to work with PMI under the Collaboration Agreement, as there has been no significant progress on product development.

 
20

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




8.
Agreements (continued):

 
The future milestones and potential shares to be issued are as follows:

 Hiring of staff and readying of equipment              500,000
 Demonstration of working single-junction
    solar cell with efficiency greater than 4%             500,000
 Demonstration of working single-junction
    or multiple junction cell with efficiency
    greater than 10%                                              2,500,000

We have discontinued the monthly payments, as PMI has not been able to continue its development work and accordingly the Company does not anticipate that there will be any future compensation to PMI.

       On December 10, 2008 we executed a Patent and Trademark Purchase Agreement (the “Purchase Agreement”) with PV.  Nuvo acquired certain patent rights and trademarks in exchange for $39,900.  Accordingly, the Company increased its intellectual property by $39,900 which was initially included in the balance sheet. Through July 31, 2010 the Company had amortized $2,331 of the $39,900.  As of July 31, 2010 the Company has been unable to commercialize the license and management believes the asset has been permanently impaired and accordingly has expensed the remaining $37,569 of the intellectual property acquired, and such amount is included in other expenses for the year ended July 31, 2010.
 
9.    Income taxes:

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred taxes, as of October 31, 2010, are as follows:

Deferred tax assets:
     
  Net operating loss carryforward
  $ 336,000  
  Less valuation allowance
    (336,000 )
Total net deferred tax assets
    -  

The Company may have had a change of ownership as defined by the Internal Revenue Code Section 382. As a result, a substantial annual limitation may be imposed upon the future utilization of its net operating loss carryforwards. At this point, the Company has not completed a change in ownership study and the exact impact of such limitations is unknown. The company has no accrued tax liability, as the income was derived from the sale of a subsidiary and the liabilities were alleviated through formal bankruptcy proceedings.

The federal statutory tax rate reconciled to the effective tax rate during the three months ended October 31, 2010 and 2009, respectively, is as follows:

   
2010
 
2009
         
Tax at U.S. Statutory Rate
 
35.0%
 
35.0%
State tax rate, net of federal benefits
 
5.0%
 
5.0%
Change in valuation allowance
 
(40.0)
 
(40.0)
         
   
0.0%
 
0.0%

 
21

 
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 and 2009




10.       Subsequent Events:

             On November 30, 2010, the Company filed a Certificate of Amendment to Certificate of Designations for its Series A Preferred Stock whereby the Company and the holders of the Series A Preferred stock agreed to extend the Mandatory Conversion date for the Series A Preferred Stock to November 30, 2013.  Additionally, the holders of the Series A Preferred were granted voting rights, whereby the shares of preferred stock held are eligible to vote on an as if converted basis pursuant to the conversion terms in the Certificate of Designation of Designation of Series A Preferred Stock on matters presented for a vote by the Company's stockholders. Effective on November 30, 2010, the Company issued upon the conversion of $275,541 in debt payable to the Company's Chief Executive Officer,160,000 shares of its Series A Preferred Stock.
 
On December 1, 2010, the Company filed Amended and Restated Articles of Incorporation with the Secretary of State of Nevada, pursuant to which the Company increased the authorized capital stock of the Company from 500,000,000 shares to 1,500,000,000 shares par value $0.001, of which 25,000,000 shares may be preferred stock having the voting powers, designations, preferences, limitations, restrictions and relative rights as determined by the board of directors from time to time.
 
Effective December 1, 2010, the stockholders of the Company through a written consent executed by stockholders holding 59% of the outstanding shares of the Company’s preferred and common stock entitled to vote, adopted and approved the Amended and Restated Articles of Incorporation, which were adopted by the Company’s board of directors on November 30, 2010.  In addition, stockholders authorized the Company’s officers, in their discretion, to take any and all actions as they deem necessary, advisable or appropriate in order to effectuate any potential business opportunity, including without any limitation, executing and delivering such agreements, instruments and documents contemplated by any agreement that the Company may enter into, and performing any obligations of the Company thereunder, including without limitation any reverse stock split and increase in authorized shares of the Company.
 
On December 1 2010, the Company entered into a note agreement with an institutional investor for the issuance of a convertible promissory note in the amount of $45,000 (“Convertible Note”).  Among other terms, the Convertible Note is due nine months from the issuance date, bears interest at 8% per annum, payable in cash or shares at the Conversion Price as defined herewith, and are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock for the ten trading days immediately preceding the date of conversion.  Upon the occurrence of an event of default, as defined in the 2010 Convertible Notes, the Company is required to pay interest at 22% per annum and the holders may at their option declare the Convertible Note, together with accrued and unpaid interest, to be immediately due and payable.  In addition, the Convertible Note provides for adjustments for dividends payable other than is shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.  The Company may at its own option and with additional costs may prepay the Convertible Note, inclusive and must maintain sufficient authorized shares reserved for issuance under the Convertible Note.

  On December 7, 2010 we received net proceeds of $42,500 after debt issuance costs of $2,500 paid for lender legal fees. These debt issuance costs will be amortized over the terms of the Convertible Note.

 
22

 

ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS, FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE", "MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON THE VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

GENERAL

China Nuvo Solar Energy, Inc. (the “Company”) formerly known as Interactive Games, Inc. (“Interactive”).

Pursuant to an Agreement and Plan of Reorganization dated as of April 23, 2007, as amended on July 25, 2007 (the “Share Exchange”), by and between the Company and Nuvo Solar Energy, Inc., a Colorado corporation (“Nuvo”) incorporated on April 13, 2006, we and Nuvo entered into a share exchange whereby all of the issued and outstanding capital stock of Nuvo, on a fully-diluted basis, was exchanged for like securities of the Company, and whereby Nuvo became our wholly owned subsidiary.  The Share Exchange was effective as of July 25, 2007, upon the completed filing of Articles of Exchange with the Nevada Secretary of State and a Statement of Share Exchange with the Colorado Secretary of State.  Contemporaneously with the Share Exchange, we changed our name to “China Nuvo Solar Energy, Inc.”

Nuvo was formed for the purpose of seeking a business opportunity in the alternate energy or “next-generation energy" sector. This industry sector encompasses non-hydro carbon based energy production and renewable energy technologies that are “net-zero" or emissions free.
 
On June 9, 2006 Nuvo signed a license agreement with Photovoltaics.com, Inc. (“PV”), Hutchinson Island, Florida.  Nuvo acquired exclusive worldwide rights to PV's solar cell technology relating to a multiple stacked solar cell using wave guide transfers. This license agreement includes all patents issued pursuant to certain patent applications or amendments that have been filed and the rights to use all applicable copyrights, trademarks and related intellectual property obtained on or in connection with the process and products. As consideration for this license, Nuvo paid a total aggregate license fee of $250,000.   The term of the license is for 10 years, automatically renewable for successive ten year terms under the same terms and conditions as provided for in this agreement. As of July 31, 2010 the Company has been unable to commercialize the license and management believes the asset has been permanently impaired and accordingly has expensed the remaining $145,834 of the intellectual property acquired, and such amount is included in other expenses for the year ended July 31, 2010.  Nuvo also agreed to pay PV a fee of $180,000 over the first three years of the agreement to act as a consultant.

 
23

 


On January 23, 2008, the Company purchased from PV the patents related to the solar technology in exchange for 2,000,000 restricted shares of common stock of the Company.  The Company now owns all rights, title and interest in the patents, including all issued patents or other intellectual property arising from the patents worldwide.  The Company valued the common stock at $0.075 per share (the market price of the common stock on November 16, 2007, the date the parties agreed to the number of shares to be issued) and initially, increased its intellectual property asset by $150,000 on the balance sheet. As of July 31, 2010 the Company reviewed this asset and as part of the review determined that since the Company has not been able to commercialize the technology and is currently not pursuing the commercialization of the technology that the asset has been permanently impaired. Accordingly, the Company has recorded an impairment expense of $150,000, included in other expenses for the year ended July 31, 2010.

On December 10, 2008 we executed a Patent and Trademark Purchase Agreement (the “Purchase Agreement”) with PV.  Nuvo acquired certain patent rights and trademarks in exchange for $39,900.  As of July 31, 2010 the Company has been unable to commercialize the license and management believes the asset has been permanently impaired and accordingly has expensed the remaining $37,569 of the intellectual property acquired, and such amount is included in other expenses for the year ended July 31, 2010.

OVERVIEW

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto for the years ended July 31, 2009 and 2008.  The financial statements presented for the three months ended October 31, 2010 and 2009 include the Company, Nuvo, its wholly-owned subsidiary and Interactive Games, Inc., its majority owned subsidiary, a Florida Corporation.

In light of the foregoing, the historical data presented below is not indicative of future results. You should read this information in conjunction with the audited consolidated financial statements of the Company, including the notes to those statements and the following “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”.

The Company’s financial statements for the three months ended October 31, 2010 and 2009 have been prepared on a going concern basis, which contemplates the realization of its remaining assets and the settlement of liabilities and commitments in the normal course of business.  The Company has incurred significant losses since its inception and has a working capital deficit of approximately $2,281,000, and an accumulated shareholders’ deficit of approximately $2,275,000 as of October 31, 2010.  Nuvo has not yet earned any sources of revenue.

These factors raise substantial doubt about the Company’s ability to continue as a going concern.  There can be no assurance that the Company will have adequate resources to fund future operations or that funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

On November 27, 2007, we executed a Collaboration and Development Agreement (the “Agreement”) with Pioneer Materials, Inc. (“PMI”) of Torrance, California. Under the terms of the Agreement, PMI will build, equip, operate and manage, for our benefit, a product development, testing and prototype manufacturing facility in PMI’s Chengdu, Sichuan, China facility located in Chengdu’s West High Tech development zone.  The agreement with PMI had the objective to develop, test and manufacture prototypes of solar energy products using our licensed technology based on an invention titled “Photovoltaic cell with integral light transmitting waveguide in a ceramic sleeve”.
  

 
24

 



Pursuant to the terms of the Agreement, the Company agreed to pay PMI $2,500 per month and PMI is eligible to receive up to 4,000,000 shares of our common stock, of which 500,000 shares of common stock were issued upon the execution of the Agreement, upon the satisfactory completion of certain milestone accomplishments in the Agreement.   

In May of 2008, the Chengdu region of China experienced a catastrophic earthquake.  As a result of this earthquake and the after effects including significant problems with the delivery of electricity, PMI suspended their development work for a significant period of time.  There had been no significant progress on product development and we no longer are continuing to work with PMI under the Collaboration Agreement. We have discontinued paying the $2,500 monthly fee and have not, nor expect to issue any additional shares to PMI.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended October 31, 2010, net cash used in operating activities was $5,098 compared to $43,628 for the three months ended October 31, 2010.  Net loss was $184,689 for the three months ended October 31, 2010 compared to $81,312 for the three months ended October 31, 2010. The net loss in the current period includes non-cash expenses of $115,239 of which $21,792 is depreciation and amortization and $93,447 associated with the fair market valuation of the convertible debentures.

Net cash provided by financing activities for the three months ended October 31, 2010 was $5,000 compared to $43,693 for the three months ended October 31, 2010. For the three months ended October 31, 2010, the Company received $5,000 on the issuance of related notes payable. For the three months ended October 31, 2010 the Company received proceeds of $51,235 on the issuance of notes payable, of which $1,200 were from related parties, and also repaid $7,550 of related party notes payable.

For the three months ended October 31, 2010, cash and cash equivalents decreased by $98 compared to a increase in cash and cash equivalents of $65 for the three months ended October 31, 2010.  Ending cash and cash equivalents at October 31, 2010 was $306 compared to $369 at October 31, 2010.

We have limited cash and cash equivalents on hand and need to raise funds to continue to be able to support our operating expenses and to meet our other obligations as they become due.  Sources available to us that we may utilize include the sale of unsecured convertible debentures, as well as the exercise of outstanding options and warrants, all of which may cause dilution to our stockholders.

Although our balance sheet includes current liabilities of $2,128,163, a portion of this amount are in the form of a derivative liability of $300,037 and convertible notes of $100,000.  These amounts, plus any accrued and unpaid interest, may be converted to common stock, thereby reducing our debt service obligations.  Nevertheless, we will be required to raise funds in order to fund our operations and costs associated with being a publicly traded company.

Over the next twelve months management will be re-examining its business plan. We do not intend to enter into any additional direct development of our technology.  Rather, we plan to become an incubator of the solar technology we currently own and technology that we may acquire in the future. We currently do not have any agreements to acquire any additional technology.  In order to acquire additional technology we would either have to raise additional money through equity or debt financing or in the alternative issue shares of our common stock. We intend to study the feasibility of sub-licensing or entering into other types of agreements with third parties, whereby the third party will compensate us by paying a license fee and subsequent royalties.  The compensation may be in the form of cash or in the licensee’s common stock.  Through our established relationships we plan to focus on the identification, acquisition and potential license or resale of renewable and alternative energy technologies.



 
25

 


OPERATING EXPENSES

Operating expenses for the three months ended October 31, 2010 and 2009 were $54,098 and $520,168, respectively. The current year expenses include management and consulting fees of $39,000 are comprised of wages accrued to our chief executive officer ($30,000), and to our corporate secretary ($9,000), and $15,000 for legal and accounting fees. The expenses for the three months ended October 31, 2009 were comprised of salaries and stock compensation costs of $106,094 comprised of the Black Sholes option model costs of $100,000 for options granted to purchase 10,000,000 shares of common stock at an exercise price of $0.01, expiring in August 2019 and $6,094 of deferred stock compensation expensed.  Legal and accounting expenses were $8,070, management and consulting fees of $48,000 are comprised of wages accrued to our chief executive officer ($30,000), our corporate secretary ($9,000), and payments of $9,000 to our CFO.  Other expenses of $16,001 include $7,169 of amortization and depreciation expense and general and administrative costs of $8,832.

OTHER INCOME (EXPENSE)

Other expenses for the three months ended October 31, 2010 was $130,591 and $270,048 respectively.  The increase in derivative liabilities included in other expenses for the three months ended October 31, 2010 was $93,447 and $96, respectively.  Interest expense for the three months ended October 31, 2010 and 2009 is summarized as:

   
Three months ended
 
   
October 31,
 
   
2010
   
2009
 
             
Amortization of debenture note discounts
  $ 16,084     $ 46,717  
Debenture interest
    3,100       4,494  
Notes interest, related
    7,610       6,723  
Notes and other interest
    11,019       10,170  
                 
    $ 37,813     $ 68,104  

CONTRACTUAL OBLIGATIONS

No material changes outside the ordinary course of business during the quarter ended October 31, 2010.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results will differ from those estimates.

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”). As required ASC 718, the Company will recognize the cost resulting from all stock-based payment transactions including shares issued under its stock option plans in the financial statements. There are 16,500,000 stock options outstanding as of October 31, 2010.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards ("SFAS'") SFAS No. 165 (ASC Topic 855), "Subsequent Events", SFAS No. 166 (ASC Topic 810), "Accounting for Transfers of Financial Assets-an Amendment of FASB Statement No. 140", SFAS No. 167 (ASC Topic 810), "Amendments to FASB Interpretation No.

 
26

 

46(R)", and SFAS No. 168 (ASC Topic 105), "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162" were recently issued. The Company does not believe that these new pronouncements have applicability to the Company or their effect on the financial statements would not have been significant.  The Company evaluated for subsequent events through the issuance date of the Company’s financial statements.

Accounting Standards Update ("ASU") ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU No. 2009-13 (ASC Topic 605), Multiple-Deliverable Revenue arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and various other ASU's No. 2009-2 through ASU No. 2009-15 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.
 
The Company does not expect that adoption of these or other recently issued accounting pronouncements will have a material impact on its financial position, results of operations or cash flows.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company we are not required to provide the information required by this item.

ITEM 4T.
DISCLOSURE CONTROLS AND PROCEDURES

A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that review and evaluation, the CEO and CFO have concluded that as of October 31, 2010 disclosure controls and procedures, were not effective to ensure that information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) 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. The Company first intends to focus it’s efforts on stabilizing the business as a going concern, and secondly, designing and installing effective controls as soon as cash flow, and funding to do so become available.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.

 
27

 


Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may still occur.

There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1.              Legal Proceedings

              None

Item 1A. Risk Factors

                As a smaller reporting company we are not required to provide the information required by this
                item.

Item 2.              Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.              Defaults upon Senior Securities

              None.

Item 4.              Submission of Matters to a Vote of Security Holders

              None.

Item 5.              Other Information

              None.

 
28

 


Item 6.              Exhibits

Exhibit Number
Description
   
31.1
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
   
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
   
32.1
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
   
32.2
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

 
29

 

 SIGNATURES

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

 
China Nuvo Solar Energy, Inc.
 
(Registrant)
   
Date: December 14, 2010
By: /s/ Henry Fong
 
Henry Fong
 
Principal Executive Officer


30