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EX-32.1 - PERFECTENERGY INTERNATIONAL LTD | v209323_ex32-1.htm |
EX-32.2 - PERFECTENERGY INTERNATIONAL LTD | v209323_ex32-2.htm |
EX-31.2 - PERFECTENERGY INTERNATIONAL LTD | v209323_ex31-2.htm |
EX-31.1 - PERFECTENERGY INTERNATIONAL LTD | v209323_ex31-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended: October 31,
2010
¨ TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from __________ to __________
Commission
file number: 000-51704
PERFECTENERGY INTERNATIONAL
LIMITED
(Exact
name of registrant as specified in its charter)
Nevada
|
98-0548438
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
No. 479 You Dong Road,
Xinzhuang Town, Shanghai, People’s Republic of China, 201100
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (8621)
5488-0958
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $0.001 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act ¨
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o
Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. x
Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o
Yes o No
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act).
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). o
Yes x No
As
of April 30, 2010, the last business day of the registrant’s most recently
completed second fiscal quarter, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was $3,105,159 based on
the closing sale price of $0.22 as reported by the OTC Bulletin Board and
14,114,360 shares held by non-affiliates.
As of
January 27, 2011, there were 29,626,916 shares of common stock
outstanding.
Page
No.
|
||
PART
I
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4
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Item
1. Business
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4
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Item
2. Properties
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10
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Item
3. Legal Proceedings
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10
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PART
II
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10
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Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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10
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Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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12
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Item
8. Financial Statements and Supplementary Data
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16
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Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
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17
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Item
9A. Controls and Procedures
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17
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PART
III
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18
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Item
10. Directors, Executive Officers and Corporate Governance
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18
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Item
11. Executive Compensation
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20
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Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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24
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Item
13. Certain Relationships and Related Transactions, and Director
Independence
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26
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Item
14. Principal Accounting Fees and Services
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26
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PART
IV
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26
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Item
15. Exhibits, Financial Statement Schedules
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26
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SIGNATURES
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28
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2
This
annual report on Form 10-K contains forward-looking statements. Such
forward-looking statements include statements regarding, among other things, (a)
our projected sales and profitability, (b) our growth strategies, (c)
anticipated trends in our industry, (d) our future financing plans, and (e) our
anticipated needs for working capital. Forward-looking statements
that involve assumptions and describe our future plans, strategies, and
expectations are generally identifiable by use of the words “may,” “will,”
“should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project”
or the negative of these words or other variations on these words or comparable
terminology. This information may involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, performance,
or achievements to be materially different from the future results, performance,
or achievements expressed or implied by any forward-looking
statements. These statements may be found under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business,” as well as in this annual report generally. Actual events
or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under “Risk Factors” and matters described in this annual report
generally. This annual report may contain market data related to our
business that may have been included in articles published by independent
industry sources. Although we believe these sources are reliable, we
have not independently verified this market data. This market data
includes projections that are based on a number of assumptions. If
any one or more of these assumptions turns out to be incorrect, actual results
may differ materially from the projections based on these
assumptions. In light of these risks and uncertainties, there can be
no assurance that the forward-looking statements contained in this annual report
will in fact occur. In addition to the information expressly required
to be included in this annual report, we will provide such further material
information, if any, as may be necessary to make the required statements, in
light of the circumstances under which they are made, not
misleading.
Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this annual report as well as other public reports
that may be filed with the United States Securities and Exchange
Commission. You should not place undue reliance on any
forward-looking statement as a prediction of actual results or
developments. We are not obligated to update or revise any
forward-looking statement contained in this annual report to reflect new events
or circumstances unless and to the extent required by applicable
law. Neither the Private Securities Litigation Reform Act of 1995 nor
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”)
provides any protection for statements made in this annual report.
When used
in this annual report, the terms the “Company,” “Perfectenergy Nevada,” “we,”
“us,” “our,” and similar terms refer to Perfectenergy International Limited, a
Nevada corporation, and our subsidiaries.
3
Corporate
Overview
We were
originally incorporated on February 25, 2005 in the State of Nevada under our
former name “Crestview Development Corporation.” On April 16, 2007,
we changed our name to “Perfectenergy International Limited.”
We
conduct operations through our wholly owned subsidiary, Perfectenergy
International Limited, a private British Virgin Islands corporation
(“Perfectenergy BVI”), and Perfectenergy BVI’s three wholly owned subsidiaries
(i) Perfectenergy (Shanghai) Limited, a company organized under the laws of the
People’s Republic of China (“Perfectenergy Shanghai”), (ii) Perfectenergy GmbH,
a German corporation (“Perfectenergy GmbH”), and (iii) Perfectenergy Solar-Tech
(Shanghai) Ltd., a company organized under the laws of the People’s Republic of
China (“Perfectenergy Solar-Tech”).
Perfectenergy
BVI was incorporated under the laws of the British Virgin Islands as an
International Business Company on April 1, 2005. Perfectenergy
Shanghai was organized under the laws of the People’s Republic of China on July
8, 2005. Perfectenergy Solar-Tech was incorporated in the PRC on
February 28, 2008. Perfectenergy BVI, through Perfectenergy Shanghai
and Perfectenergy Solar-Tech, is principally engaged in the research,
development, manufacturing, and sale of solar cells, solar modules, and
photovoltaic systems.
We
conduct sales in Europe through Perfectenergy GmbH, which was formed in Germany
on November 9, 2007. The principal function of Perfectenergy GmbH is
marketing, installation, and other after-sales services for our PV
products.
Our
principal offices are located at No. 479 You Dong Road, Xinzhuang Town, Shanghai
in the PRC. We also have a German office located at Tannenweg 8,
53757 Sankt Augustin, Germany.
Our
Operations
Our
operations consist of the research, development, manufacturing, and sale of
solar cells, solar modules, and photovoltaic (“PV”) systems. Our
manufacturing and research facility is located in Shanghai, China.
We have a
45 megawatt (“MW”) solar cell production line and a 60 MW solar panel lamination
line. In our facility’s solar cell and solar panel lamination
production lines, we are able to produce different kinds of cells, such as
6-inch cells and 8-inch cells, mono-crystalline cells and multi-crystalline
cells, and different types and sizes of solar modules. After the
manufacturing process, our products are put through a rigorous quality assurance
process. All of our products are strictly in accordance with
international standards, such as IEC61215, TUV Safe Class II, and UL1703, in
order to maintain our competitiveness in international
markets.
We
believe that our manufacturing processes allow us to produce PV
solar products at a much lower cost than traditional solar cell
manufacturing for the same levels of production due to our lower capital
cost. Our production line requires less capital
investment than traditional solar cell production lines for the same levels
of production due to the proprietary nature and in-house manufacturing of our
capital equipment, while the competition must import costly capital equipment
from Germany and Japan.
We also
have a sales and marketing force that is led by our Chief Executive
Officer. Our targeted customers, besides our existing customers, are
mostly system integrators and distributors in the United States, Europe, and
China.
Principal
Products and Services
We
believe our photovoltaic (“PV”) cells and modules are highly competitive with
other products in the solar energy market in terms of efficiency and
quality. We expect to continue improving the conversion efficiency
and power, and reducing the thickness, of our solar products as we continue to
devote significant financial and human resources in our various research and
development programs.
PV
Cells
We
design, manufacture, and market crystalline solar cells (approximately 6 inch
squares composed of silicon and glass) sold as crystalline solar modules (metal
grid structures housing 72 cells).
A PV cell
is a silicon semiconductor device that converts sunlight into electricity by a
process known as the photovoltaic effect. The following table sets
forth the specifications for samples of two types of PV cells we
produce:
4
PV Cell Type
|
Dimensions
(mm×mm)
|
Conversion
Efficiency (%)
|
Thickness
(microns)
|
||||
Monocrystalline
silicon cell
|
125x125
|
16.50
– 17.30
|
%
|
200-230
|
|||
Multicrystalline
& Monocrystalline silicon cell
|
156x156
|
16.50
– 17.30
|
%
|
200-230
|
The key
technical efficiency measurement of PV cells is the conversion efficiency
rate. In general, the higher the conversion efficiency rate, the
lower the production cost of PV modules per watt because more power can be
incorporated into a given size package. The average conversion
efficiency rate of our monocrystalline PV cells reached 17.3% in November 2008,
representing an increase from 18% in December 2005 when we began producing PV
cells. We currently produce a variety of PV cells ranging from 200
microns to 230 microns in thickness.
PV Modules
A PV
module is an assembly of PV cells that is electrically interconnected and
laminated in a durable and weatherproof package. Our solar cells are
often sold as components of assembled modules. We are also developing
PV modules with higher power to meet the rising expansion of on-grid
configurations. The majority of the PV modules we currently offer to
our customers range in power between 170W and 230W. We also perform
limited original equipment manufacturing work for other solar cell producers,
such as selling standalone solar modules. We sell approximately 90%
of our PV modules under our “Perfectenergy” brand and approximately 10% of our
PV modules under the brand names of our customers.
Distribution
We sell
our products to a number of systems integrators and distributors, primarily
located in Germany, who purchase their solar modules, purchase software, and
hardware from other vendors and integrate and install the end-product for
customers. Many of our customers, in turn, sell turnkey solar systems
to end-users that include individual owners of agricultural buildings; owners of
commercial warehouses, offices, and industrial buildings; public agencies and
municipal government authorities that own buildings suitable for solar system
deployment; owners of land designated as former agricultural land, waste land,
or conversion land, such as former military bases or industrial areas; and
financial investors that desire to own large scale solar projects.
Market
and Industry Overview
The solar
power market has experienced rapid growth in the past several
years. According to Solarbuzz LLC, an independent solar energy
research firm, the global solar PV market size reached about 16 GW in 2010, and
the estimated market size is expected to be more than 20 GW in 2011. Also
according to a Solarbuzz forecast, even in the slowest growth scenario, the
global market is expected to be 2.5 times its current size by
2014.
We
believe the solar power market will continue to grow as a result of the growing
adoption of government incentives for solar energy sources, rising energy demand
and limited fossil energy sources, and the growing awareness of the advantages
of solar energy, all of which are discussed below.
Growing
Adoption of Government Incentives for Solar and Other Renewable Energy
Sources
In
response to the increasing environmental concerns worldwide, many governments
have promulgated regulations and implemented policies to limit the release of
hazardous and greenhouse gases, such as carbon dioxide, and to encourage the use
of renewable energy sources. Due to the fact that most renewable
energy sources are currently less cost competitive than traditional energy
sources, a growing number of countries have created incentive programs for the
solar sector, including:
|
·
|
direct subsidies to end users to
counter costs of equipment and
installation;
|
|
·
|
net metering laws enabling
on-grid end users to sell electricity back to the grid at retail
prices;
|
|
·
|
government standards mandating
minimum consumption levels of renewable energy
sources; and
|
|
·
|
low interest loans and tax
incentives to finance solar power
systems.
|
Due to
government support in the past decade, solar energy has become an attractive
alternative to traditional energy sources. Set forth below are brief
descriptions of the incentive programs adopted by the following selected
countries:
China. With cheaper raw
materials and PV technology innovation, however, solar electricity cost in China
was reduced by 50% from 2008 to 2010, making solar power a strong candidate to
become a major energy resource. Falling solar power generation cost
and rising demand as the main drivers for the uptake, China revised its 2020
target for solar power capacity from 1.8 GW to 20 GW. In February
2005, China enacted the Renewable Energy Law, which became effective in January
2006. This law provides certain financial incentives for the
development of renewable energy projects. Various local authorities
have also introduced initiatives to encourage the adoption of renewable energy,
including solar energy. In addition, the government has enacted
several policies to support the solar industry, including a regional feed-in
tariff and national subsidies for solar PV installations such as subsidy scheme
on rooftop projects. We expect that the increase in solar energy
consumption in local municipalities will encourage further growth of the solar
energy industry in China.
5
The
Company was entitled to receive a 50% reduction from the regular income tax rate
of 25% in 2009, and we are entitled to the preferential tax rate of 15% for
having been granted a high technology certification from the local tax authority
in 2010. The Chinese government also granted us a refund on value
added taxes (“VAT”), which are imposed on exported goods at a 17%
rate. Enterprises or individuals who sell products, engage in repair
and maintenance, or import and export goods in China are subject to VAT in
accordance with Chinese laws. The standard VAT is 17% of the gross
sales price. To the best of our knowledge, we are not eligible to
receive similar subsidies or incentives from any other government.
Germany. Under its
Renewable Energy Sources Act, Germany aims to increase the share of electricity
from renewable energy to 12.5% by 2010 and 20% by 2020. In
particular, the Renewable Energy Sources Act requires electricity transmission
grid operators to connect various renewable energy sources to their electricity
transmission grids and to purchase all electricity generated by such sources at
guaranteed feed-in tariffs. Additional regulatory support measures
include investment cost subsidies, low-interest loans, and tax relief to end
users of renewable energy.
Italy. Before
2005, the Italian PV market benefited primarily from regional support for PV
installations with grants of up to 65% of investment in the absence of national
incentive funds. In 2005, Italy passed a new law that set fixed
feed-in tariffs for electricity produced from renewable energy
sources. The incentives are available to individuals, companies, and
public bodies. In January 2006, the Italian government approved
various measures relating to PV feed-in tariffs, including increasing the PV
feed-in tariff cap to 500 MW by 2015.
Japan. The
Japanese government has implemented a series of incentive programs, including
the “PV 2030” roadmap that outlines government policies to support solar power
electricity. Japan also provides government subsidies for research
and development.
Spain. The
incentive regime in Spain includes a national net metering program and favorable
interest loans. The actual feed-in tariff for solar energy in Spain is fully
guaranteed for 25 years and guaranteed at 80% for subsequent
years.
United States. At
the federal level, several recent developments are favorable to the PV industry
in general in the United States. The United States Congress approved
the Energy Policy Act of 2005, which provides a 30% investment tax credit for PV
installations. With the “Extension and Modification of Solar Energy and
Fuel Cell Investment Tax Credit” bill passed by Congress in 2008, the tax credit
for PV installation was extended through 2016. This bill lifted a
limitation that prevented public utilities from claiming the investment tax
credit, which may increase solar panel sales to U.S. utilities that now qualify
to receive a 30% tax credit for their first PV installation. The bill
also allows these credits to be used to offset the alternative minimum tax
(AMT). Further, President Obama’s New Energy for America plan set
forth the goal for 10% of electricity generated in the U.S. to come from
renewable energy sources by 2012 and 25% by 2025. In addition, a
number of states, including California and New Jersey, have committed
substantial resources to developing and implementing renewable energy
programs. Under the California Solar Initiative, an investment of
$3.2 billion will be made from 2006 to 2017 for the installation of 1 million PV
plants with the total output of more than 3,000MW. Investors in these
PV plants will get refunds from the state and federal governments of
approximately 75% of their total investment, and the investors are to receive a
guaranteed profit of 12% on average for the electricity produced by their PV
plants with certificates of green power. In April 2006, the New
Jersey Board of Public Utilities voted to approve new regulations which expand
the state’s Renewable Portfolio Standard by extending the existing goals out to
2020 and increasing the required amount of renewable energy and solar
energy. Under the newly adopted regulations, 20% of New Jersey’s
electricity must come from renewable sources by 2020. The New Jersey
regulations also include a 2% solar set aside, which is forecast to require
1,500MW of electricity to be generated through solar power, the largest solar
commitment relative to population and electricity consumption in the United
States.
Rising
Energy Demand and Limited Fossil Energy Sources with Increasing
Prices
In recent
years, global economic development has resulted in surging energy demand and
rising energy prices. Electric power demand is expected to increase
from 16.1 trillion kilowatt hours in 2002 to 31.7 trillion kilowatt hours by
2030 globally. Meanwhile, the generation of electric power is
capacity-constrained and dependent upon fossil fuel feedstock. The
situation is compounded by the finite supply of traditional energy sources, such
as natural gas, coal, and petroleum. In addition, petroleum prices
have risen dramatically because of war, political instability, labor unrest, and
the threat of terrorism in oil-producing regions. Further, for
national security reasons, many governments seek to further develop domestic
sources of energy. Thus, future energy demand is increasingly
expected to be met by renewable energy sources, such as solar
energy.
6
Growing Awareness
of the Advantages of Solar Power
Solar
power offers a variety of advantages over other sources of power, including an
absence of the need for fuel, environmental cleanliness, location based energy
production, greater efficiency during peak demand periods, high reliability, and
modularity. These advantages include the following:
No fossil fuel
requirement. Solar power relies solely on sunlight rather than
traditional fossil fuels that have historically experienced supply constraints,
volatile pricing and delivery risk.
Clean energy
production. Unlike traditional fossil fuel energy sources and
many other renewable energy sources, solar power systems generate electricity
with no emissions or noise impact.
Location-based energy
production. Solar power is a distributed energy source,
meaning that the electricity can be generated at the site of
consumption. This provides a significant advantage to the end user
who is not reliant upon the traditional electricity infrastructure for delivery
of electricity to the site of use.
Energy generated to match peak usage
times. Peak energy usage and high electricity costs typically occur
mid-day, which also generally corresponds to peak sunlight hours and solar power
electricity generation.
Reliable Source of
Electricity. Solar power
systems generally do not contain moving parts, nor do they require significant
ongoing maintenance.
Modular. Solar power
systems are made from interconnecting and laminating solar cells into solar
modules. Given this method of construction, solar power products can
be deployed in many different sizes and configurations to meet specific customer
needs.
Challenges
Facing the Solar Power Industry
Although
solar power has several advantages and is an attractive alternative to
traditional energy sources, there remain certain key challenges that the solar
power industry must overcome to accomplish broad commercialization of its
products, including the following:
Possible Reduction or Elimination of
Government Subsidies and Incentives. The current growth of the
solar power industry substantially relies on the availability and size of
government subsidies and economic incentives, such as capital cost rebates,
reduced tariffs, tax credits, net metering, and other
incentives. Governments may eventually decide to reduce or eliminate
these subsidies and economic incentives. It remains a challenge for
the solar power industry to reach sufficient scale to be cost-effective in a
non-subsidized marketplace.
High Cost of Solar Power.
Generally, the per kilowatt-hour cost of generating solar electricity,
including the upfront capital costs, is greater than retail electricity
rates. While government policy mechanisms and heightened consumer
awareness are driving solar power adoption, the cost of solar power products
remains an impediment to growth. To address this issue, manufacturers
must improve the cost efficiency of solar power systems through innovation and
continuous improvement of production techniques. For example,
improving conversion efficiencies of solar cells will reduce raw material
requirements and lower costs required to manufacture a solar power system with a
given output. Higher conversion efficiencies also decrease the size
of the solar power system, and thereby lower the system installation
costs.
Shortages of Raw Materials.
Polysilicon is the main raw material used in manufacturing our solar
cells. Currently, there is some relief in the supply shortage of
polysilicon in the industry. However, due to strong demands in the PV
products in next few years, we believe that the industry-wide shortage of
polysilicon will continue to have a material impact on our liquidity because
suppliers will likely require more advance payments for the polysilicon that
they supply to us as our production expands. Further, a shortage may
also have a material effect on our results of operations because a shortage will
likely cause the price of polysilicon to rise. Such increase will
likely cause an increase in the cost of producing our products especially if we
must obtain more polysilicon in the market to produce our products as our
production expands in the future. In addition, we believe effective
supply chain management is critical to ensure continued growth for the
industry.
Competition
The
global solar power market is highly competitive and has rapidly
evolved. Various government incentive and subsidy programs
implemented in the United States, Europe, China, Japan, and other countries in
recent years have further induced competition in solar energy product
marketplace. In particular, a large number of manufacturers have
entered the solar market.
Our main
overseas competitors, including those in the United States, include BP Solar,
Kyocera Corporation, Mitsubishi Electric Corporation, Motech Industries Inc.,
Sharp Corporation, Q-Cells AG, Sanyo Electric Co., Ltd., and Sunpower
Corporation. Our primary competitors in China include Suntech Power
Holding’s Co., Ltd., Baoding Tianwei Yingli New Energy Resources Co., Ltd., and
Nanjing PV-Tech Co., Ltd.
7
We
compete primarily on the basis of the power efficiency, quality, performance,
and appearance of our products, price, strength of supply chain and distribution
network, after-sales service, and brand image. Many of our
competitors, however, have longer operating histories and significantly greater
financial or technological resources than we do and enjoy greater brand
recognition. Some of our competitors are vertically integrated and
design and produce upstream silicon wafers, mid-stream PV cells and modules, and
downstream solar application systems, which provide them with greater synergies
to achieve lower production costs. During periods when there is a
shortage of silicon and silicon wafers, we compete intensely with our
competitors in obtaining adequate supplies of silicon wafers. Moreover, many of
our competitors are developing next-generation products based on new PV
technologies, including amorphous silicon, transparent conductive oxide thin
film, carbon material, and nano-crystalline technologies, which, if successful,
will compete with the crystalline silicon technology we currently use in our
manufacturing processes. We are seeking to develop new technologies
and products through our research collaborations.
We, like
other solar energy companies, also face competition from traditional non-solar
energy industries, such as the petroleum and coal industries. The
production cost per watt of solar energy is significantly higher than other
types of energy. As a result, we cannot provide assurances that solar
energy will be able to compete with other energy industries in the long-term,
especially if there is a reduction or termination of government incentives and
other forms of support for solar energy.
Sources
and Availability of Raw Materials
Our
manufacturing process uses approximately 20 types of raw materials and
components that undergo a qualification process to construct a complete solar
module. We currently source these raw materials and components from
domestic suppliers in China, and most of our critical materials and components
are either sourced from only one supplier or supplied by a limited number of
suppliers. Supply of these materials is stable for the most part as a
result of the maturity of solar related production in China.
One key
raw material in our production process is silicon wafers. We purchase
all of our silicon wafers from a limited number of suppliers. We have
long term supply contracts with two major suppliers, which provides for monthly
price adjustments based on the spot rate of silicon. These contracts
are more fully described below under “Principal Suppliers.”
Principal
Suppliers
Silicon
is essential for manufacturing our products and, as noted above, silicon
manufacturers are not currently able to keep up with demand. We
have a long-term silicon supply agreement with Chengdu Jiayang Silicon
Technology, Inc., Ltd. (“Chengdu”). Our purchase obligations under
this agreement were 1 million silicon wafers in 2010 and are 1.2 million silicon
wafers in 2011 and 1.5 million silicon wafers in 2012. Due to
fluctuations in the silicon supply market, the purchasing price of these silicon
wafers is based on market conditions.
Other
materials needed to produce cells and modules, such as chemicals, special-made
glasses, etc. are relatively easy to purchase from multiple vendors, and we
intend to work with two to three vendors to ensure the best pricing and quality
of these supplies.
Customers
We sell
our products to a number of systems integrators and distributors, mostly located
in Europe and China, who purchase solar cells and solar modules from us,
software and hardware from other vendors, and then integrate and install the
end-product for their customers. These systems integrators sell
turnkey solar systems to end-users that include the following:
|
·
|
Individual owners of agricultural
buildings,
|
|
·
|
Owners of commercial warehouses,
offices, and industrial
buildings,
|
|
·
|
Public agencies and municipal
government authorities,
|
|
·
|
Owners of land designated as
former agricultural land, waste land, or conversion land, such as former
military bases or industrial areas,
and
|
|
·
|
Financial investors interested in
owning large scale solar
projects.
|
Our top
three customers by value, who accounted for 50% of our revenue during the fiscal
year ended October 31, 2010 are as follows:
|
·
|
Alpensolar GmbH, accounting for
24% of revenue;
|
|
·
|
B&W Energy GmbH, accounting
for 19% of revenue; and
|
|
·
|
ProsolarTech GmbH, accounting for
7% of revenue.
|
8
Intellectual
Properties and Licenses
The
following table describes the intellectual property owned by the Company:
Type
|
Name
|
Issued by
|
Duration
|
Description
|
||||
Trademark
|
Trademark
Bureau of the People’s Republic of China
|
Ten
years from 2009 to 2019 (and renewable within six months prior to the end
of each ten-year term for additional ten-year periods)
|
Logo,
brand name used in our products
|
|||||
Trademark
|
Trademark
Bureau of the People’s Republic of China
|
August
21, 2010 to August 20, 2020
|
Logo,
brand name used in our products
|
|||||
Patent
|
Solar
cell fire furnace equipment
|
Intellectual
Property Bureau of the People’s Republic of China
|
May
25, 2006 to May 25, 2016 (10 years)
|
To
increase cell efficiency with proper cell production
technique
|
||||
Patent
|
Solar
wafer drying equipment
|
Intellectual
Property Bureau of the People’s Republic of China
|
May
17, 2006 to May 17, 2016 (10 years)
|
To
dry wafers more effectively, thus improving quality and increasing
yield
|
||||
Patent
|
Preparation
method of Chalcogenide Glass (with Rare Earth elements)
|
Intellectual
Property Bureau of the People’s Republic of China
|
July
11, 2003 to July 10, 2013
|
To
improve efficiency in absorption of sunlight to PV module
system
|
We are
certified by IEC61215 and Safety Class II for TUV. Both IEC and TUV
are international standards for electronic appliances. We also
applied for UL certification (standards for electronic appliance in the United
States), and we expect this certification process to be completed in early
2011.
We have
also filed applications for three patents in Shanghai, which are currently being
reviewed by local authority.
Research
and Development
During
the fiscal years ended October 31, 2010 and October 31, 2009, we incurred
$509,181 and $409,148, respectively, for research and development primarily
related to the development of new types of crystalline PV cells as well as
improvement on the conversion efficiency of PV cell and module
products.
Environmental
Matters
Our
manufacturing processes generate noise, wastewater, gaseous wastes, and other
industrial wastes. We have various types of anti-pollution equipment
installed in our facilities to reduce, treat, and, where feasible, recycle the
wastes generated in our manufacturing process. We outsource the
treatment of some of our wastewater and other liquid wastes to third-party
contractors.
Our
operations are subject to regulation and periodic monitoring by local
environmental protection authorities in Shanghai. In conjunction with
our efforts with the construction of our new solar cell production facility, we
are planning to further improve management of the environmental issues relating
to our operations, including consultations with local environmental protection
authorities and compliance with regulations. Management believes that
we have all environmental permits necessary to conduct our business and have
obtained all necessary environmental permits for our facility in
Shanghai. Management also believes that we have properly handled
our hazardous materials and wastes and have appropriately remediated any
contamination at any of our premises. We are not aware of any pending
or threatened environmental investigation, proceeding, or action by foreign,
federal, state, or local agencies or third parties involving our current
facilities. Any failure by us to control the use of or to restrict adequately
the discharge of, hazardous substances could subject us to substantial financial
liabilities, operational interruptions and adverse publicity, any of which could
materially and adversely affect our business, results of operations, and
financial condition.
9
Employees
As of
January 31, 2011, we had approximately 150 employees, all of which are full-time
employees.
ITEM
2. PROPERTIES.
Offices
and Facilities
The table
below provides a general description of our offices and facilities:
Location
|
Principal Activities
|
Area (sq. meters)
|
Lease Expiration Date
|
|||||||
No.
479 You Dong Road, Xinzhuang Town, Shanghai, People’s Republic
of China 201100
|
Company
headquarters;
manufacturing
facility
|
6,200 |
May
31, 2011
|
|||||||
Tannenweg
8-10, 53757 Sankt Augustin,
Germany
|
European
sales and marketing office
|
274 | (1) | |||||||
569
Zhuan Sheng Road, Shanghai, People’s Republic of China
201100
|
Perfectenergy
Solar-Tech production facility
|
1,943 | (1) |
(1)
|
This
lease is currently expired, but we are negotiating a renewal with the
landlord. During negotiations, we have an oral agreement with
the landlord to continue the terms of the expired
leases.
|
We lease
the space for our headquarters and factory premises under a property lease
agreement that expires on May 31, 2011, with an option to renew the
lease. We lease the space for our sales and marketing office in
Germany under a property lease agreement that expired in November
2010. The additional production facility used by Perfectenergy
Solar-Tech is leased under a property lease agreement that also expired in March
2010. The terms of both expired leases are still in effect under an
oral agreement with the landlords during negotiations to renew the expired
leases. At October 31, 2010, minimum future commitments under the
lease agreements were as follows:
Year Ended October 31,
|
Amount
|
|||
2011
|
$
|
132,397
|
||
Thereafter
|
$
|
―
|
We know
of no material, existing or pending legal proceedings against us, nor are we
involved as a plaintiff in any material proceeding or pending
litigation. To the best of our knowledge, there are no proceedings in
which any of our directors, officers, or affiliates, or any registered or
beneficial holder of more than 5% of our voting securities, or any associate of
such persons, is an adverse party or has a material interest adverse to the
Company.
PART II
Market
Information
Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“PFGY.” The following table sets forth, for the periods indicated,
the reported high and low closing bid quotations for our common stock as
reported on the OTC Bulletin Board for each quarterly period within our two most
recent fiscal years. The bid prices reflect inter-dealer quotations,
do not include retail markups, markdowns, or commissions, and do not necessarily
reflect actual transactions.
10
Common
Stock
Quarter Ended
|
High Bid
|
Low Bid
|
||||||
October
31, 2010
|
$
|
0.10
|
$
|
0.05
|
||||
July
31, 2010
|
$
|
0.195
|
$
|
0.06
|
||||
April
30, 2010
|
$
|
0.26
|
$
|
0.16
|
||||
January
31, 2010
|
$
|
0.53
|
$
|
0.16
|
||||
October
31, 2009
|
$
|
0.42
|
$
|
0.19
|
||||
July
31, 2009
|
$
|
0.42
|
$
|
0.20
|
||||
April
30, 2009
|
$
|
0.45
|
$
|
0.19
|
||||
January
31, 2009
|
$
|
0.80
|
$
|
0.11
|
As of
January 27, 2011, the closing sales price for shares of our common stock was
$0.09 per share on the OTC Bulletin Board.
Holders
As of
January 28, 2011, we have 23 stockholders of record of our issued and
outstanding common stock based upon a shareholder list provided by our transfer
agent. Our transfer agent is Holladay Stock Transfer, Inc. located at
2939 North 67th Place, Suite C, Scottsdale, Arizona 85251, and their telephone
number is (480) 481-3940.
Dividend
Policy
We do not
currently intend to pay any cash dividends in the foreseeable future on our
common stock and, instead, intend to retain earnings, if any, for
operations. Any decision to declare and pay dividends in the future
will be made at the discretion of our board of directors and will depend on,
among other things, our results of operations, cash requirements, financial
condition, contractual restrictions, and other factors that our board of
directors may deem relevant.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table sets forth, as of October 31, 2010, certain information related
to our compensation plans under which shares of our common stock are authorized
for issuance.
Plan Category
|
COLUMN A:
Number of Securities
to be Issued upon
Exercise of
Outstanding Options
Warrants and Rights
|
Weighted-Average Exercise
Price of Outstanding
Options, Warrants and
Rights
|
Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in COLUMN
A)
|
|||||||||
Equity
compensation plans approved by security holders
|
1,369,387
|
(1)
|
$
|
2.54
|
130,613
|
(2)
|
||||||
Equity
compensation plans not approved by security holders
|
―
|
―
|
―
|
|||||||||
Total
|
1,369,387
|
$
|
$2.54
|
130,613
|
(1)
|
Includes outstanding options
granted pursuant to the Company’s 2007 Stock Incentive
Plan.
|
(2)
|
Includes shares remaining
available for future issuance under the Company’s 2007 Stock Incentive
Plan.
|
On
September 5, 2007, our board of directors approved the 2007 Stock Incentive Plan
(the “Plan”), which was also approved by a majority of our shareholders at our
annual shareholder meeting held on September 2, 2008. All of our
employees, officers, and directors, and those of our consultants and advisors
who (i) are natural persons and (ii) provide bona fide services to the Company
not connected to a capital raising transaction or the promotion or creation of a
market for our securities are eligible to be granted options or restricted stock
awards (each, an “Award”) under the Plan. The Plan is administered by
our board, and the board establishes certain terms of option awards, including
the exercise price and duration, in the applicable option
agreement. Awards may be made under the Plan for up to 1,500,000
shares of our common stock, and the maximum number of shares of common stock
with respect to which Awards may be granted to any participant under the Plan is
500,000 shares of common stock. The Plan allows for adjustments for
changes in common stock and certain other events, including, but not limited to,
any stock split, reverse stock split, stock dividend, recapitalization,
combination of shares, reclassification of shares, spin-off, any distribution to
holders of common stock other than a normal cash dividend, and liquidation or
dissolution.
11
The
following discussion and analysis of the results of operations and financial
condition of Perfectenergy International Limited for the fiscal years ended
October 31, 2010 and 2009 should be read in conjunction with our financial
statements and the notes to those financial statements that are included
elsewhere in this report. Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations, and intentions. Actual
results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors,
including those set forth under the Cautionary Statement Regarding
Forward-Looking Information and Business sections in this report. We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.
OVERVIEW
We were
originally incorporated on February 25, 2005 in the State of Nevada under our
former name “Crestview Development Corporation.” As a result of a
share exchange transaction that closed on August 8, 2007, our business is the
research, development, manufacturing, and sale of solar cells, solar modules,
and photovoltaic (“PV”) systems through our direct and indirect wholly owned
subsidiaries.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
This
discussion and analysis are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported net sales and expenses during the reporting periods. On an
ongoing basis, we evaluate our estimates and assumptions. We base our
estimates on historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Inventories
Inventories
are stated at the lower of cost or market using a weighted average cost
method. The Company reviews its inventory periodically for possible
obsolete goods to determine if any reserves are necessary for potential
obsolescence. The Company provides for slow moving inventory based on
an analysis of the aging and utility of the inventory.
Revenue
Recognition
The
Company’s revenue recognition policies are in accordance with the FASB’s
accounting standard. Revenues from solar cells, solar modules, and PV
systems are recognized upon shipment of the products only if no significant
Company obligations remain, the fee is fixed or determinable, and collection is
received or the resulting receivable is deemed probable. Revenue is
recognized, net of discount and allowances, at the time of product
shipment. All of the Company’s products that are sold in the PRC are
subject to a Chinese VAT at a rate of 17% of the gross sales price or at a rate
approved by the PRC local government. All of the Company’s products
that are sold in Germany are subject to a Germany VAT at a rate of 19% of the
gross sales price or at a rate approved by the Germany government. In
general, the Company does not accept product returns; only under special
situations, when both the Company and customers agree, is a product exchange
allowed. Historically, the Company has not experienced any product
returns. For solar cells, solar modules, and PV systems, the Company
is covered by product quality insurance and product liability
insurance. The product quality insurance retroactively covers the
period from July 1, 2007 to the end of the insurance period on June 30,
2011. As such, the Company does not maintain a provision for
potential warranty cost.
Fair
Value of Financial Instruments
The
accounting standards regarding fair value of financial instruments and related
fair value measurements define financial instruments, define fair value,
establish a three-level valuation hierarchy for disclosures of fair value
measurement, and enhance disclosure requirements for fair value measures. The
carrying amounts reported in the consolidated balance sheets for current assets
and current liabilities qualify as financial instruments and reflect reasonable
estimates of fair value because of the short period of time between the
origination of such instruments and their expected realization. The three levels
of valuation hierarchy are defined as follows:
|
·
|
Level
1 inputs to the valuation methodology, which are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
|
|
·
|
Level
2 inputs to the valuation methodology that includes quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly,
substantially for the full term of the financial
instrument.
|
12
|
·
|
Level
3 inputs to the valuation methodology that are unobservable and
significant to the fair value
measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity, pursuant to which the Company’s warrants were required to be recorded as
a liability at fair value and marked to market each reporting
period.
Research
and Development Costs
Research
and development expenses are expensed as incurred. Research and
development expenses include salaries, consultant fees, supplies, and materials,
as well as costs related to other overhead such as facilities, utilities, and
other departmental expenses. The costs the Company incurs with
respect to internally developed technology and engineering services are included
in research and development expenses.
Recently
Issued Accounting Standards
In
October 2009, the FASB issued an Accounting Standards Update (“ASU”) 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 ASU did not have a material impact on the Company’s
consolidated financial statements.
In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and reporting
for decreases in ownership of a subsidiary. Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value. In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction. This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets. This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009. The
adoption of this ASU did not have a material impact on its consolidated
financial statements.
In
January 2010, FASB issued ASU No. 2010-06 – “Improving Disclosures about Fair
Value Measurements.” This update provides amendments to Subtopic 820-10 that
requires new disclosure to include transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements. Further, this update
clarifies existing disclosures on level of disaggregation and disclosures about
inputs and valuation techniques. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The adoption of this ASU did not have a material impact on its
consolidated financial statements.
In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements”. ASU 2010-09
primarily rescinds the requirement that, for listed companies, financial
statements clearly disclose the date through which subsequent events have been
evaluated. Subsequent events must still be evaluated through the date of
financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other Securities and Exchange Commission (“SEC”)
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010.
In April
2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades.” ASU
2010-13 provides amendments to Topic 718 to clarify that an employee share-based
payment award with an exercise price denominated in currency of a market in
which a substantial porting of the entity’s equity securities trades should not
be considered to contain a condition that is not a market, performance, or
service condition. Therefore, an entity would not classify such an award as a
liability if it otherwise qualifies as equity. The amendments in this ASU are
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. The adoption of this ASU did
not have a material impact on its consolidated financial
statements.
13
RESULTS
OF OPERATIONS
The
following table sets forth the results of our operations for the fiscal years
ended October 31, 2010 and 2009.
Fiscal Year
Ended
October 31,
2010
|
% of
Revenues
|
Fiscal Year
Ended
October 31, 2009
|
% of
Revenues
|
|||||||||||||
REVENUES
|
$
|
74,601,090
|
100
|
%
|
$
|
31,454,956
|
100.0
|
%
|
||||||||
COST
OF REVENUES
|
67,234,057
|
90.1
|
%
|
30,346,831
|
96.5
|
%
|
||||||||||
GROSS
PROFIT
|
7,367,033
|
9.9
|
%
|
1,108,125
|
3.5
|
%
|
||||||||||
SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSES
|
9,635,261
|
12.9
|
%
|
7,683,195
|
24.4
|
%
|
||||||||||
LOSS
FROM OPERATIONS
|
(2,268,228
|
)
|
(3.0
|
)%
|
(6,575,070
|
)
|
(20.9
|
)%
|
||||||||
OTHER
EXPENSES (INCOME), NET
|
(79,480)
|
(0.1
|
)%
|
(553,537
|
) |
(1.8
|
)%
|
|||||||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(2,188,748)
|
(2.9
|
)%
|
(6,021,533
|
)
|
(19.1
|
)%
|
|||||||||
PROVISION
(BENEFIT) FOR INCOME TAXES
|
539,350
|
0.7
|
%
|
(337,198
|
)
|
(1.1
|
)%
|
|||||||||
NET
LOSS
|
(2,728,098
|
)
|
(3.6
|
)%
|
(5,684,335
|
)
|
(18.1
|
)%
|
||||||||
OTHER
COMPREHENSIVE LOSS
|
||||||||||||||||
Foreign
currency translation adjustment
|
164,540
|
0.2
|
%
|
225,774
|
0.7
|
%
|
||||||||||
COMPREHENSIVE
LOSS
|
(2,563,558
|
)
|
(3.4
|
)%
|
(5,458,561
|
)
|
(17.4
|
)%
|
REVENUES. During the
fiscal year ended October 31, 2010, we had revenues of $74.6 million as compared
to revenues of $31.5 million during the fiscal year ended October 31, 2009, an
increase of approximately137%. The increase in revenues is
attributable to increased shipment of PV modules to the European market, which
are backed by strong orders from both existing and new customers due to a lower
sales price in Europe and continued support of clean energy from European
governments.
COST OF REVENUES. Cost
of revenues for the fiscal year ended October 31, 2010 was $67.2 million as
compared to $30.3 million for the fiscal year ended October 31, 2009, an
increase of approximately 122%. The increase is due to
incremental sales of our solar modules as well as a reduction by more than 50%
in the cost of silicon wafers/cells compared to the same period last year due to
an increased supply of silicon wafers in the market.
GROSS PROFIT. Our gross
profit for the fiscal year ended October 31, 2010 was $7.4 million as compared
to a gross profit of $1.1 million for the fiscal year ended October 31, 2009,
representing gross margins of approximately 9.9% and 3.5%,
respectively. The increase in gross profit was primarily due to a
decrease in our raw material costs, which was offset by reduced average module
sales prices. The cost of silicon wafers/cells fell by 55% while the sales price
of modules was reduced by 50% compared to the same period last year. In
addition, the increase in gross margin is also attributed to continuous focuses
on cost control measures on manufacturing process.
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES. Selling, general, and administrative expenses totaled
$9.6 million for the fiscal year ended October 31, 2010 as compared to $7.7
million for the fiscal year ended October 31, 2009, an increase of approximately
25%. The increase is attributable to increased export sales-related
expenses, including shipping and transportation costs and freight, and expenses
related to increased travel by our sales team in Europe.
OTHER EXPENSES (INCOME).
Other income for the fiscal year ended October 31, 2010 consisted of
non-operating income, interest income, and change in fair value of derivative
instruments. We had other income of $79,480 for the fiscal year ended
October 31, 2010 as compared to $0.6 million for the fiscal year ended October
31, 2009. The source of other income for both periods was the
positive impact from changes in the value of our issued and outstanding
warrants.
NET INCOME (LOSS). We
had net loss of $2.7 million for the fiscal year ended October 31, 2010 as
compared to net loss of $5.7 million for the fiscal year ended October 31,
2009. The decrease in net loss is primarily attributable to
significantly improved gross margins from sales revenue and offset by
incremental sales-related costs.
14
LIQUIDITY
Cash Flows
Net cash
used in operating activities was $1.1 million for the fiscal year ended
October 31, 2010, while net cash provided by operating activities was $1.8
million for the fiscal year ended October 31, 2009. The decrease in
net cash flow from operating activities was mainly due to decrease in
customer deposits and accounts payable balances. With strong demands of silicon
wafers in the market, we increased the portion of cash settlement for silicon
wafer/cells purchases during the fourth quarter of our last fiscal
year.
Net cash
used in investing activities was $0.5 million for the fiscal year ended
October 31, 2010, while net cash used in investing activities was $0.4
million for the fiscal year ended October 31, 2009. Similar to the
prior fiscal year, we continued to control spending on equipment-related
costs.
There
were no financing activities during our fiscal years ended October 31, 2010 and
2009.
CAPITAL
RESOURCES
We
currently do not have any binding commitments for, or readily available sources
of, additional financing. We may require additional cash due to
changes in business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. To the extent it
becomes necessary to raise additional cash in the future, we may seek to raise
it through the sale of debt or equity securities, funding from joint-venture or
strategic partners, debt financing or loans, issuance of common stock, or a
combination of the foregoing. We cannot provide any assurances that
we will be able to secure the additional cash or working capital we may require
to continue our operations, either now or in the future.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity, or market risk support to such
entity. We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk, or credit support to us
or engages in leasing, hedging, or research and development services with
us.
CONTRACTUAL
OBLIGATIONS
We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates. We cannot provide certainty
regarding the timing and amounts of payments. We present in the table
below a summary of the most significant assumptions used in our determination of
amounts in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following table summarizes our contractual obligations as of October 31, 2010,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods.
|
Payments Due by Period
|
|||||||||||||||||||
|
Total
|
Less than
1 year |
1-3 Years
|
3-5 Years
|
5 Years +
|
|||||||||||||||
|
In
Thousands |
|||||||||||||||||||
Contractual Obligations:
|
||||||||||||||||||||
Bank
Indebtedness
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
Other
Indebtedness
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
Capital
Lease Obligations
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
Operating
Leases (1)
|
$
|
132
|
$
|
132
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
Purchase
of Land Use Rights
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
Total
Contractual Obligations:
|
$
|
132
|
$
|
132
|
$
|
—
|
$
|
—
|
$
|
—
|
(1)
|
Operating lease amounts include
the lease for our main office and manufacturing facility. All
leases are on a fixed repayment basis. None of the leases
includes contingent rentals.
|
15
Our
consolidated financial statements for the fiscal years ended October 31, 2010
and 2009 begin on the following page, starting with page F-1.
16
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Perfectenergy
International Ltd. and subsidiaries
We have
audited the accompanying consolidated balance sheets of Perfectenergy
International Ltd. and subsidiaries as of October 31, 2010 and 2009 and the
related consolidated statements of operations and other comprehensive loss,
shareholders’ equity, and cash flows for each of the years in the two-year
period ended October 31, 2010. Perfectenergy International Ltd’s
management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Perfectenergy International
Ltd. and subsidiaries as of October 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the two-year period
ended October 31, 2010 in conformity with accounting principles generally
accepted in the United States of America.
/s/
Frazer Frost, LLP
Brea,
California
January
31, 2011
F-1
PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
BALANCE SHEETS
|
||||||||
AS
OF OCTOBER 31, 2010 AND 2009
|
||||||||
ASSETS
|
||||||||
2010
|
2009
|
|||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 2,392,053 | $ | 3,582,854 | ||||
Accounts
receivable
|
3,992,826 | 3,744,299 | ||||||
Other
receivables
|
457,943 | 2,287,510 | ||||||
Inventories,
net
|
8,161,566 | 10,059,078 | ||||||
Prepayments
|
1,246,154 | 524,356 | ||||||
Total
current assets
|
16,250,542 | 20,198,097 | ||||||
EQUIPMENT
AND LEASEHOLD IMPROVEMENTS, net
|
6,032,389 | 6,819,144 | ||||||
OTHER
ASSETS:
|
||||||||
Other
receivables - long term, net of allowance for doubtful
accounts
|
||||||||
of
$ 3,803,387 and $1,861,097 as of October 31, 2010 and 2009
|
- | 1,861,097 | ||||||
Deferred
tax assets
|
10,184 | 376,105 | ||||||
Advances
on equipment purchases
|
- | 470,108 | ||||||
Total
other assets
|
10,184 | 2,707,310 | ||||||
Total
assets
|
$ | 22,293,115 | $ | 29,724,551 | ||||
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 7,661,988 | $ | 11,682,262 | ||||
Accrued
liabilities
|
1,012,588 | 1,082,397 | ||||||
Customer
deposits
|
354,923 | 2,402,554 | ||||||
Other
payables
|
73,641 | 118,491 | ||||||
Taxes
payables
|
3,195,366 | 3,121,838 | ||||||
Total
current liabilities
|
12,298,506 | 18,407,542 | ||||||
FAIR
VALUE OF DERIVATIVE INSTRUMENTS
|
- | 29,563 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Common
stock, $.001 par value, 94,250,000 shares authorized, 29,626,916
shares
|
||||||||
issued
and outstanding as of October 31, 2010 and 2009
|
29,627 | 29,627 | ||||||
Additional
paid-in capital
|
9,408,487 | 8,137,766 | ||||||
Statutory
reserves
|
110,068 | 110,068 | ||||||
Retained
earnings (deficit)
|
(1,091,021 | ) | 1,637,077 | |||||
Accumulated
other comprehensive income
|
1,537,448 | 1,372,908 | ||||||
Total
shareholders' equity
|
9,994,609 | 11,287,446 | ||||||
Total
liabilities and shareholders' equity
|
$ | 22,293,115 | $ | 29,724,551 |
The accompanying notes are an integral part of these
consolidated financial statements.
See report of independent registered public accounting
firm.
F-2
PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
|
||||||||
FOR
THE YEARS ENDED OCTOBER 31, 2010 AND 2009
|
||||||||
2010
|
2009
|
|||||||
REVENUES
|
$ | 74,601,090 | $ | 31,454,956 | ||||
COST
OF REVENUES
|
67,234,057 | 30,346,831 | ||||||
GROSS
PROFIT
|
7,367,033 | 1,108,125 | ||||||
OPERATING
EXPENSES:
|
||||||||
Selling,
general and administrative
|
9,126,080 | 7,274,047 | ||||||
Research
and development
|
509,181 | 409,148 | ||||||
Total
operating expenses
|
9,635,261 | 7,683,195 | ||||||
LOSS
FROM OPERATIONS
|
(2,268,228 | ) | (6,575,070 | ) | ||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income (expense) and other bank charges
|
(6,541 | ) | 5,826 | |||||
Non-operating
income (expense)
|
56,457 | (152,414 | ) | |||||
Change
in fair value of derivative instruments
|
29,564 | 700,125 | ||||||
Total
other income (expense)
|
79,480 | 553,537 | ||||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(2,188,748 | ) | (6,021,533 | ) | ||||
PROVISION
(BENEFIT) FOR INCOME TAXES
|
539,350 | (337,198 | ) | |||||
NET
LOSS
|
(2,728,098 | ) | (5,684,335 | ) | ||||
OTHER
COMPREHENSIVE LOSS:
|
||||||||
Foreign
currency translation adjustments
|
164,540 | 225,774 | ||||||
COMPREHENSIVE
LOSS
|
$ | (2,563,558 | ) | $ | (5,458,561 | ) | ||
LOSS
PER SHARE:
|
||||||||
Basic
|
$ | (0.09 | ) | $ | (0.19 | ) | ||
Diluted
|
$ | (0.09 | ) | $ | (0.19 | ) | ||
WEIGHTED
AVERAGE NUMBER OF SHARES:
|
||||||||
Basic
|
29,626,916 | 29,626,916 | ||||||
Diluted
|
29,626,916 | 29,626,916 |
The accompanying notes are an integral part of these
consolidated financial statements.
See report of independent registered public accounting
firm.
F-3
PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
Additional
|
Retained
earnings (deficit)
|
other
|
||||||||||||||||||||||||||
Common
stock
|
paid-in
|
Statutory
|
comprehensive
|
|||||||||||||||||||||||||
Shares
|
Par
value
|
capital
|
reserves
|
Unrestricted
|
income
|
Total
|
||||||||||||||||||||||
BALANCE,
October 31, 2008
|
29,626,916 | $ | 29,627 | $ | 6,509,898 | $ | 110,068 | $ | 7,321,412 | $ | 1,147,134 | $ | 15,118,139 | |||||||||||||||
Options
issued to employees
|
1,627,868 | 1,627,868 | ||||||||||||||||||||||||||
Net
loss
|
(5,684,335 | ) | (5,684,335 | ) | ||||||||||||||||||||||||
Foreign
currency translation adjustments
|
225,774 | 225,774 | ||||||||||||||||||||||||||
BALANCE,
October 31, 2009
|
29,626,916 | $ | 29,627 | $ | 8,137,766 | $ | 110,068 | $ | 1,637,077 | $ | 1,372,908 | $ | 11,287,446 | |||||||||||||||
Options
issued to employees
|
1,270,721 | 1,270,721 | ||||||||||||||||||||||||||
Net
loss
|
(2,728,098 | ) | (2,728,098 | ) | ||||||||||||||||||||||||
Foreign
currency translation adjustments
|
164,540 | 164,540 | ||||||||||||||||||||||||||
BALANCE,
October 31, 2010
|
29,626,916 | $ | 29,627 | $ | 9,408,487 | $ | 110,068 | $ | (1,091,021 | ) | $ | 1,537,448 | $ | 9,994,609 |
The accompanying notes are an integral part of these
consolidated financial statements.
See report of independent registered public accounting
firm.
F-4
PERFECTENERGY
INTERNATIONAL LTD. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
FOR
THE YEARS ENDED OCTOBER 31, 2010 AND 2009
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (2,728,098 | ) | $ | (5,684,335 | ) | ||
Adjustments
to reconcile net loss to cash
|
||||||||
provided
by (used in) operating activities:
|
||||||||
Depreciation
|
1,838,838 | 1,330,194 | ||||||
Bad
debt expenses
|
2,120,398 | 1,859,448 | ||||||
Write
off on inventory
|
- | 467,931 | ||||||
Recovery
on obsolete inventory
|
(87,884 | ) | - | |||||
Loss
from discontinuance of construction project
|
28,280 | 3,872 | ||||||
Stock-based
compensation expense
|
1,270,721 | 1,627,868 | ||||||
Change
in fair value of derivative instruments
|
(29,564 | ) | (700,125 | ) | ||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(548,288 | ) | 308,974 | |||||
Other
receivables
|
1,846,282 | (4,096,860 | ) | |||||
Inventories
|
1,525,470 | (4,174,593 | ) | |||||
Prepayments
|
(710,496 | ) | 3,886,279 | |||||
Prepaid
income taxes
|
- | 110,473 | ||||||
Refundable
taxes credit on export sales
|
- | 242,269 | ||||||
Deferred
tax assets
|
341,774 | (337,197 | ) | |||||
Accounts
payable
|
(4,214,023 | ) | 5,632,308 | |||||
Accrued
liabilities
|
(57,808 | ) | (32,025 | ) | ||||
Customer
deposits
|
(1,860,780 | ) | (1,437,719 | ) | ||||
Other
payables
|
(62,982 | ) | (91,588 | ) | ||||
Taxes
payable
|
246,253 | 2,843,098 | ||||||
Net
cash provided by (used in) operating activities
|
(1,081,907 | ) | 1,758,272 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of equipment and leasehold improvements
|
(762,719 | ) | (348,012 | ) | ||||
Advances
on equipment purchases
|
- | (95,640 | ) | |||||
Refund
of deposit from land use rights
|
279,850 | - | ||||||
Net
cash used in investing activities
|
(482,869 | ) | (443,652 | ) | ||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
373,975 | 246,182 | ||||||
INCREASE
(DECREASE) IN CASH
|
(1,190,801 | ) | 1,560,802 | |||||
CASH,
beginning of year
|
3,582,854 | 2,022,052 | ||||||
CASH,
end of year
|
$ | 2,392,053 | $ | 3,582,854 | ||||
Supplemental
disclosures:
|
||||||||
Interest
paid
|
$ | - | $ | - | ||||
Income
taxes paid
|
$ | - | $ | - | ||||
Non-cash
investing and financing activity:
|
||||||||
Value-added
tax refund received on domestic equipment purchase
|
||||||||
transferred
from construction in progress to offset tax payable
|
$ | - | $ | 133,316 |
The accompanying notes are an integral part of these
consolidated financial statements.
See report of independent registered public accounting
firm.
F-5
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010
Note
1 – Summary of Significant Accounting Policies
(a) Organization and
Description of Business
Perfectenergy
International Limited (“PFGY” or “the Company”) was incorporated in the State of
Nevada on February 25, 2005. The Company, through its subsidiaries,
is principally engaged in the research, development, manufacturing, and sale of
solar cells, solar modules, and photovoltaic (“PV”) systems. The
Company’s manufacturing and research facility is located in Shanghai, China, and
it has sales and service offices in Shanghai, China and Germany.
In
October 2007, the Company entered into an Investment Agreement with Shanghai
Zizhu Science Park Development Co., Ltd. (“Science Park”), under which the
Company planned to construct a new solar cell production facility on certain
land in the Shanghai Zizhu Science-Based Industrial District of Shanghai, China,
which would have expanded lamination and cell production capacity. As
required by the Investment Agreement, on February 28, 2008, the Company formed
Perfectenergy Solar-Tech (Shanghai) Ltd. (“Perfectenergy Solar-Tech”) under the
laws of the People’s Republic of China (“PRC” or “China”) as a wholly owned
subsidiary of Perfectenergy International Limited (“Perfectenergy
BVI”). Perfectenergy BVI was required to contribute $20,000,000 to
the registered capital of Perfectenergy Solar-Tech, of which $4,000,000 has been
contributed with the remaining $16,000,000 which should have been contributed by
February 28, 2010. Due to supplementary land use
restrictions, the Company obtained approval from local authority for a
reduction in Perfectenergy Solar-Tech’s required registered capital from
$20 million to $4 million. All registration documents of Perfectenergy
Solar-Tech were completed in early September 2010.
(b) Basis of Presentation and
Principles of Consolidation
The
consolidated financial statements reflect the activities of the Company and its
wholly owned subsidiaries, Perfectenergy BVI, Perfectenergy (Shanghai) Limited
(“Perfectenergy Shanghai”), Perfectenergy GmbH (“Perfectenergy GmbH”), and
Perfectenergy Solar-Tech.
All
significant intercompany balances and transactions have been eliminated in
consolidation. The Company has reclassified certain prior year
amounts to conform to the current year presentation. These reclassifications
have no effect on net loss. The accompanying consolidated financial statements
are in U.S. dollars and include PFGY and each of its wholly owned
subsidiaries.
(c) Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
amounts reported in the financial statements and accompanying
notes. Management considers many factors in selecting appropriate
operational and financial accounting policies and controls, and in developing
the assumptions used to prepare these financial
statements. Management must apply significant
judgment. Among the factors, but not fully inclusive of all factors
that may be considered by management, are the following: the range of accounting
policies permitted by accounting principles generally accepted in the United
States of America; management’s understanding of the Company’s business - both
historical results and expected future results; the extent to which operational
controls exist that provide high degrees of assurance that all desired
information to assist in the estimation is available and reliable or whether
there is greater uncertainty in the information that is available upon which to
base the estimate; expectations of the future performance of the economy, both
domestically, and globally, within various areas that serve the Company’s
principal customers and suppliers of goods and services; expected rates of
exchange; sensitivity and volatility associated with the assumptions used in
developing estimates; and whether historical trends are expected to be
representative of future trends.
F-6
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010
The
estimation process often times may yield a range of potentially reasonable
estimates of the ultimate future outcomes, and management must select an amount
that lies within that range of reasonable estimates based upon the quantity,
quality, and risks associated with the variability that might be expected from
the future outcome and the factors considered in developing the
estimate. This estimation process may result in the selection of
estimates that could be viewed as conservative or aggressive by
others. Management attempts to use its business and financial
accounting judgment in selecting the most appropriate estimate; actual amounts,
however, may differ from those estimates.
(d) Fair Value of Financial
Instruments
The
accounting standards regarding fair value of financial instruments and related
fair value measurements define financial instruments, define fair value,
establish a three-level valuation hierarchy for disclosures of fair value
measurement, and enhance disclosure requirements for fair value measures. The
carrying amounts reported in the consolidated balance sheets for current assets
and current liabilities qualify as financial instruments and reflect reasonable
estimates of fair value because of the short period of time between the
origination of such instruments and their expected realization. The three levels
of valuation hierarchy are defined as follows:
·
|
Level
1 inputs to the valuation methodology, which are quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
|
·
|
Level
2 inputs to the valuation methodology that includes quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly,
substantially for the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology that are unobservable and
significant to the fair value
measurement.
|
Carrying
Value as of October 31, 2010
|
Fair
Value at October 31, 2010
|
||||
Level
1
|
Level
2
|
Level
3
|
|||
Warrant
liability (See Note 11)
|
$―
|
$―
|
$―
|
$―
|
F-7
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010
The
Company analyzes all financial instruments with features of both liabilities and
equity, pursuant to which the Company’s warrants were required to be recorded as
a liability at fair value and marked to market each reporting
period. Except for the warrant liability, the Company did not
identify any asset and liability that is required to be presented on the balance
sheet at fair value in accordance with this accounting standard.
(e) Foreign Currency
Translation
The
reporting currency of the Company is the U.S. dollar. The Company’s
principal operating subsidiaries established in the PRC use the local currency,
Renminbi (“RMB”), as their functional currency. The Company’s sales
offices in Germany use the Euro (“EUR”) as their functional
currency. The assets and liabilities of the Company’s Chinese
subsidiaries at October 31, 2010 were translated at 6.67 RMB to $1.00 as
compared to 6.82 RMB to $1.00 at October 31, 2009. The assets and
liabilities of the Company’s German subsidiary at October 31, 2010 were
translated at €0.72 to $1.00 as compared to €0.68 to $1.00 at October 31,
2009. Equity accounts were stated at their historical
rate. The average translation rates applied to statement of
operations accounts of the Company’s Chinese subsidiaries for the years ended
October 31, 2010 and 2009 were 6.79 RMB and 6.82 RMB, respectively.
The average translation rates applied to statement of operations accounts of the
Company’s German subsidiary for the years ended October 31, 2010 and 2009 were
€0.74 and €0.73 to $1.00, respectively. For the periods
presented, adjustments resulting from translating financial statements into U.S.
dollars are reported as cumulative translation adjustments and are shown as a
separate component of other comprehensive income (loss). Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
In
accordance with the accounting standard regarding "Statement of Cash Flows,"
cash flows from the Company's operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets.
(f) Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(g) Accounts
Receivable
The
Company conducts its business operations in the PRC, and it has sales offices in
Germany. Management reviews its accounts receivable on a regular basis and
analyzes historical bad debts, customer credit worthiness, current economic
trends, and changes in customer payment patterns to determine if the allowance
for doubtful account is adequate and adjusts the allowance when
necessary. An estimate for doubtful accounts is recorded when
collection of the full amount is no longer probable.
F-8
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010
(h) Other
Receivables
Other
receivables consist of advanced payment to be refunded by the Company’s
suppliers and intercompany transfer of foreign currencies held by the Company’s
export agents. Due to the passage of time, advanced payment to be
refunded by the Company’s suppliers has been reclassified as a non-current
asset. Management reviews its other receivables on a regular basis
and analyzes the financial conditions of the Company’s suppliers and export
agents to determine if the allowance for doubtful account is adequate and
adjusts the allowance when necessary. An estimate for doubtful
accounts is recorded when collection of the full amount is no longer
probable. The Company took an additional charge of approximately
$1,868,000 during the year ended October 31, 2010 and fully reserved the
advanced inventory payment. The Company continues to seek
reimbursement from the supplier, but made a full provision against the prepaid
amount based on current situations. If the Company receives
reimbursement in the future, it will recognize income of approximately
$3,803,000. At October 31, 2010 and 2009, allowance for doubtful
accounts amounted to $ 3,803,337 and $1,861,097, respectively.
(i) Inventories
Inventories
are stated at the lower of cost or market using a weighted average cost
method. The Company reviews its inventory periodically for possible
obsolete goods to determine if any reserves are necessary for potential
obsolescence. The Company provides for slow moving inventory based on
an analysis of the aging and utility of the inventory. As of October
31, 2010 and 2009, the Company had $561,796 and $637,335, respectively, in
inventory reserve. The Company believes that the reserve is adequate
to provide for expected losses.
(j) Prepayments
Prepayments
are prepayments to the Company’s suppliers. Some of the Company’s suppliers
require advanced payment before a delivery is made. Such prepayments are
recorded in the financial statements as prepayments until delivery has
occurred.
(k) Equipment and Leasehold
Improvements
Equipment
and leasehold improvements are stated at cost. Depreciation is
computed by using the straight-line method at rates based on the estimated
useful lives of the various classes of property. Estimates of useful
lives are based upon a variety of factors including durability of the asset, the
amount of usage that is expected from the asset, the rate of technological
change, and the Company’s business plans for the asset. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset. Should the Company
change its plans with respect to the use and productivity of property and
equipment, it may require a change in the useful life of the asset or incur a
charge to reflect the difference between the carrying value of the asset and the
proceeds expected to be realized upon the asset’s sale or
abandonment. Expenditures for maintenance and repairs are expensed as
incurred and significant major improvements are capitalized.
F-9
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010
Estimated
useful lives of the Company’s assets are as follows:
Useful
Life
|
|
Leasehold
improvements
|
Lease
term (expires on May 31, 2011)
|
Transportation
equipment
|
5
years
|
Machinery
|
5 -
10 years
|
Office
equipment
|
5
years
|
(l) Impairment of Long-Lived
Assets
The
Company evaluates long-lived assets for impairment annually, and more often if
an event or circumstance occurs that triggers an impairment
test. Substantial judgment is necessary in the determination as to
whether an event or circumstance has occurred that may trigger an impairment
analysis and in the determination of the related cash flows from the
asset. Estimating cash flows related to long-lived assets is a
difficult and subjective process that applies historical experience and future
business expectations to revenues and related operating costs of
assets. Should impairment appear to be necessary, subjective judgment
must be applied to estimate the fair value of the asset, for which there may be
no ready market, which oftentimes results in the use of discounted cash flow
analysis and judgmental selection of discount rates to be used in the
discounting process. If the Company determines an asset has been
impaired based on the projected undiscounted cash flows of the related asset or
the business unit over the remaining amortization period, and if the cash flow
analysis indicates that the carrying amount of an asset exceeds related
undiscounted cash flows, the carrying value is reduced to the estimated fair
value of the asset or the present value of the expected future cash
flows. As of October 31, 2010, the Company expects these assets to be
fully recoverable.
(m) Customer
Deposits
Customer
deposits are prepayments from our customers. Some of our sales
require customers to prepay before delivery is made. Such prepayments
are recorded in our financial statements as customer deposits until delivery has
occurred.
(n) Value Added
Tax
The
Company’s sales of products in the PRC and Germany are subject to a value added
tax (“VAT”) in accordance with tax laws. The VAT applied is 17% in
the PRC and 19% in Germany of the gross sales price. A credit is
available whereby VAT paid on the purchases of semi-finished products or raw
materials used in the production of the Company’s finished products and payment
of freight expenses can be used to offset the VAT due on sales of the finished
products.
F-10
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010
(o) Provision for Income
Taxes
The
Company accounts for income taxes in accordance with the Financial Accounting
Standards Board’s (“FASB”) accounting standard for income taxes. Under the asset
and liability method as required by this accounting standard, the Company must
recognize deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes
consist of taxes currently due plus deferred taxes.
The
Company adopted FASB’s accounting standard for Accounting for Uncertainty
in Income Taxes. A tax position is recognized as a benefit only if it
is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The
amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not
meeting the “more likely than not” test, no tax benefit is
recorded. The accounting standard also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition.
The
Company accounts for income taxes using the asset and liability
method. Deferred tax liabilities and assets are determined based on
temporary differences between the basis of assets and liabilities for income tax
and financial reporting purpose of the Company. The deferred tax
assets and liabilities are classified according to the financial statement
classification of the assets and liabilities generating the
differences. Valuation allowances are established when necessary
based upon the judgment of management to reduce deferred tax assets to the
amount expected to be realized and could be necessary based upon estimates of
future profitability and expenditure levels over specific time horizons in
particular tax jurisdictions.
(p) Revenue
Recognition
The
Company’s revenue recognition policies are in accordance with the FASB’s
accounting standard. Revenues from solar cells, solar modules, and PV
systems are recognized upon shipment of the products only if no significant
Company obligations remain, the fee is fixed or determinable, and collection is
received or the resulting receivable is deemed probable. Revenue is
recognized, net of discount and allowances, at the time of product
shipment. All of the Company’s products that are sold in the PRC are
subject to a Chinese VAT at a rate of 17% of the gross sales price or at a rate
approved by the PRC local government. All of the Company’s products
that are sold in Germany are subject to a Germany VAT at a rate of 19% of the
gross sales price or at a rate approved by the Germany government. In
general, the Company does not accept product returns; only under special
situations, when both the Company and customers agree, is a product exchange
allowed. For solar cells, solar modules, and PV systems, the Company
is covered by product quality insurance and product liability
insurance. The product quality insurance retroactively covers the
period from July 1, 2007 to the end of the insurance period on June 30,
2011. As such, the Company does not maintain a provision for
potential warranty cost.
F-11
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2010
(q) Shipping and
Handling
Costs
related to shipping and handling of the products sold is included in selling,
general, and administrative expenses. Shipping and handling costs
amounted to $2,166,191 and $435,230 for the years ended October 31, 2010
and 2009, respectively.
(r) Advertising
Advertising
and promotion expenses are expensed as incurred, and the expense was immaterial
for the years ended October 31, 2010 and 2009.
(s) Research and Development
Costs
Research
and development expenses are expensed as incurred. Research and
development expenses include salaries, consultant fees, supplies, and materials,
as well as costs related to other overhead such as facilities, utilities, and
other departmental expenses. The costs the Company incurs with
respect to internally developed technology and engineering services are included
in research and development expenses.
(t) Loss per
Share
The
Company reports earnings per share in accordance with the provisions of FASB’s
related accounting standard. This standard requires the presentation of earnings
per share (EPS) as basic EPS and diluted EPS in conjunction with the disclosure
of the methodology used in computing such earnings per share. Basic
EPS excludes dilution and is computed by dividing net income (loss) attributable
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.
Year
Ended
October
31,
|
||||||||
2010
|
2009
|
|||||||
Net
loss for basic earnings per share
|
$
|
(2,728,098
|
)
|
$
|
(5,684,335
|
)
|
||
Weighted
average shares used in basic computation
|
29,626,916
|
29,626,916
|
||||||
Diluted
effect of options and warrants
|
-
|
-
|
||||||
Weighted
average shares used in diluted computation
|
29,626,916
|
29,626,916
|
||||||
Weighted
Average Earnings per share
|
||||||||
Basic
|
$
|
(0.09
|
)
|
$
|
(0.19
|
)
|
||
Diluted
|
$
|
(0.09
|
)
|
$
|
(0.19
|
)
|
For the
years ended October 31, 2010 and 2009, none of the issued and outstanding
warrants and options were included in the calculation of diluted earnings per
share since their effect would be anti-dilutive.
(u) Stock-Based
Compensation
The
Company records and reports stock based compensation pursuant to FASB’s related
accounting standard which defines a fair-value-based method of accounting for
stock based employee compensation and transactions in which an entity issues its
equity instruments to acquire goods and services from
non-employees. Stock compensation for stock granted to non-employees
has also been determined in accordance with FASB’s related accounting standard
as the fair value of the consideration received or the fair value of equity
instruments issued, whichever is more reliably measured.
Note
2 – Recently Issued Accounting Standards
In
October 2009, the FASB issued an Accounting Standards Update (“ASU”) 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 ASU did not have a material impact on the Company’s
consolidated financial statements.
In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and reporting
for decreases in ownership of a subsidiary. Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value. In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction. This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets. This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009. The
adoption of this ASU did not have a material impact on its consolidated
financial statements.
In
January 2010, FASB issued ASU No. 2010-06 – “Improving Disclosures about Fair
Value Measurements.” This update provides amendments to Subtopic 820-10 that
requires new disclosure to include transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements. Further, this update
clarifies existing disclosures on level of disaggregation and disclosures about
inputs and valuation techniques. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The adoption of this ASU did not have a material impact on its
consolidated financial statements.
In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements”. ASU 2010-09
primarily rescinds the requirement that, for listed companies, financial
statements clearly disclose the date through which subsequent events have been
evaluated. Subsequent events must still be evaluated through the date of
financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other Securities and Exchange Commission (“SEC”)
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010.
In April
2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades.” ASU
2010-13 provides amendments to Topic 718 to clarify that an employee share-based
payment award with an exercise price denominated in currency of a market in
which a substantial porting of the entity’s equity securities trades should not
be considered to contain a condition that is not a market, performance, or
service condition. Therefore, an entity would not classify such an award as a
liability if it otherwise qualifies as equity. The amendments in this ASU are
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. The adoption of this ASU did
not have a material impact on its consolidated financial
statements.
Note
3 – Accounts Receivable
Accounts
receivable consisted of the following:
October 31,
2010
|
October 31,
2009
|
|||||||
Accounts
receivable
|
$
|
3,992,826
|
$
|
3,744,299
|
||||
Less:
allowance for doubtful accounts
|
―
|
―
|
||||||
Total
|
$
|
3,992,826
|
$
|
3,744,299
|
At
October 31, 2010 and 2009, there was no allowance for doubtful accounts as
management believes all accounts balances were considered to be
uncollectible.
Note
4 – Other Receivables
Other
receivables consisted of the following:
|
October 31,
2010
|
October 31,
2009
|
||||||
Other
receivables - Current
|
$
|
457,943
|
$
|
2,287,510
|
||||
Other
receivables - Noncurrent
|
3,803,387
|
3,722,194
|
||||||
Less:
allowance for doubtful accounts
|
(3,803,387
|
)
|
(1,861,097
|
)
|
||||
Total
|
$
|
457,943
|
$
|
4,148,607
|
In June
and July 2008, Perfectenergy Shanghai entered into three purchase contracts for
purchasing original MEMC granular polysilicon from Sun Materials. In
accordance with the terms of the purchase contracts, Perfectenergy Shanghai paid
100% of the advance payments to Sun Materials totaling approximately $3.7
million. However, as of October 31, 2010, Sun Materials was unable to
either deliver the goods or return most of the advancement. Followed by an
abstract debt acknowledgement and repayment agreement between Sun Materials and
Regus BVI, its original supplier for the MEMC granular polysilicon, Regus BVI
was obligated to repay the prepayments in five installments. Regus
BVI’s repayment was not in accordance with the terms established in the
repayment agreement. Based on the current status, management
estimated that a 100% provision (approximately $3.8 million) is necessary
against the full amount. The Company will continue to assess the
collectability and make necessary adjustment if circumstances
dictate.
Note
5 – Inventories
Inventories consisted of the
following:
|
October 31,
2010
|
October 31,
2009
|
||||||
Raw
materials
|
$ | 703,452 | $ | 2,992,806 | ||||
Finished
goods
|
7,726,441 | 6,104,204 | ||||||
Work
in progress
|
277,760 | 1,576,788 | ||||||
Supplies
|
15,709 | 22,615 | ||||||
Less
inventory reserve
|
(561,796 | ) | (637,335 | ) | ||||
Total
|
$ | 8,161,566 | $ | 10,059,078 |
October
31, 2010
|
October
31, 2009
|
|||||||
Beginning
balance
|
$
|
637,335
|
$
|
168,759
|
||||
Additions
charged to costs of goods sold
|
84,389
|
467,931
|
||||||
Recovery
on obsolete inventory
|
(172,274
|
)
|
-
|
|||||
Foreign
currency translation adjustments
|
12,346
|
645
|
||||||
Ending
balance
|
$
|
561,796
|
$
|
637,335
|
Note
6 – Prepayments
Prepayments
are mostly monies deposited or advanced to outside vendors on future inventory
purchases. Some of the Company’s vendors require a certain amount of
money to be deposited with them as a guarantee that the Company will receive
their purchase on a timely basis and lower than market price. This
amount is refundable and bears no interest. Total outstanding
prepayments for inventory purchases were $1,197,636 and $491,913 as of
October 31, 2010 and October 31, 2009, respectively.
Note
7 – Equipment and Leasehold Improvements
Equipment
and leasehold improvements consisted of the following:
October 31,
2010
|
October
31, 2009
|
|||||||
Leasehold
Improvements
|
$ | 1,959,528 | $ | 1,658,986 | ||||
Transportation
equipment
|
321,774 | 276,131 | ||||||
Machinery
|
7,321,695 | 6,543,213 | ||||||
Office
equipment
|
219,731 | 233,870 | ||||||
Construction
in progress
|
― | 37,232 | ||||||
Total
|
9,822,728 | 8,749,432 | ||||||
Less:
accumulated depreciation
|
(3,790,339 | ) | (1,930,288 | ) | ||||
Total
|
$ | 6,032,389 | $ | 6,819,144 |
Construction
in progress represents the costs incurred in connection with the construction of
machinery and equipments.
Depreciation
expense for the years ended October 31, 2010 and 2009 amounted to $1,838,838 and
$1,330,194, respectively.
Note
8 – Advances on Equipment Purchases
Advances
on equipment purchases represent partial payments for deposits on equipment
purchases and amounted to $0 and $470,108 as of October 31, 2010 and October 31,
2009, respectively.
Note
9 – Late Registration Penalties
In
connection with the issuance of common stock and warrants (“Investor Warrants,”
and together with the common stock, the “Securities”) on August 8, 2007,
pursuant to Section 1(b) of the Registration Rights Agreement between the holder
of the Securities (“Investors”) and the Company, the Company was required to
have a registration statement relating to the resale of the Securities declared
effective by the SEC by January 5, 2008. A late registration entitled
the Investors to a payment by the Company of an amount equal to 2% of the
purchase price paid for the Securities due for January 7, 2008 and each 30 days
thereafter, not to exceed in the aggregate 15% of the purchase price of the
Securities. The registration statement was declared effective on
March 5, 2008. The Company owed the Investors a total of $1,079,467
as a late registration payment, which was accrued and charged to general and
administrative expenses during the year ended October 31, 2008.
In lieu
of making cash payments, the Company offered to issue restricted common stock at
a valuation of $4.00 per share for the first 30 days that the registration
statement was late in being declared effective by the SEC, to which certain of
the Investors agreed. Thus, the Company owed the Investors taking
cash payments a total of $912,347 as late registration payments. As
of October 31, 2010, the Company paid $390,744 to the Investors and issued
aggregate 41,780 shares of common stock valued at $167,120 to seven of the
Investors in lieu of a cash payment. The settlement of the remaining
$521,603 is still in progress and is recorded in accrued liabilities, and the
expected final payment date is pending by the Company’s Board of
Directors.
Note
10 – Retirement Benefit Plans
Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees. All permanent employees
are entitled to an annual pension equal to their basic salaries at
retirement. The PRC government is responsible for the benefit
liability to these retired employees. The Company is required to make
contributions to the state retirement plan at 22% of the monthly basic salaries
of the current employees. For the years ended October 31, 2010 and 2009, the
Company made pension contributions in the amount of $227,504 and $165,365,
respectively.
In order
for the Investor Warrants to be accounted for as equity, such warrants must
comply with FASB’s accounting standard related to derivative instruments and
hedging activities. The Investor Warrants contain a provision
permitting the holder to redeem the warrants for cash, based on a Black-Scholes
valuation, in the event of a change in control deemed not to be within the
Company’s control resulting in a classification of the Investor Warrants as
derivative instrument liabilities rather than as equity
instruments. The Company allocated the proceeds received between the
common stock and Investor Warrants first to the Investor Warrants based on the
fair value on the date the proceeds were received with the balance to common
stock. Net proceeds were allocated as follows:
Warrants
|
$
|
12,226,600
|
||
Common
stock
|
3,766,371
|
|||
Total
net proceeds
|
$
|
15,992,971
|
The
change in the fair value of the Investor Warrants, determined under the
Cox-Ross-Rubinstein binomial model, at each reporting date will result in either
an increase or decrease the amount recorded as liability, based on the
fluctuation of the Company’s stock price with a corresponding adjustment to
other income (or expense). For the years ended October 31, 2010 and
2009, a gain of $29,564 and $700,125, respectively, was recognized in the
accompanying statement of operations based on the decrease in fair value since
the last reporting date. At October 31, 2010 and October 31, 2009,
the fair value of the derivative instrument totaled $0 and 29,563,
respectively.
All warrants expired on
August 8, 2010. The value of the Investor Warrants at October
31, 2009 was determined using the Cox-Ross-Rubinstein binomial model using the
following assumptions: volatility 170%; risk free interest rate 0.05% for the
Investor warrants and 0.27% for the Placement and Advisory warrants; dividend
yield of 0%; and expected term of 0.27 years of the Investor Warrants and 0.77
years of the Placement and Advisory Warrants. The volatility of the Company’s
common stock was estimated by management based on the historical volatility of
our common stock, the risk free interest rate was based on Treasury Constant
Maturity Rates published by the U.S. Federal Reserve for periods applicable to
the expected life of the warrants, the expected dividend yield was based on the
Company’s current and expected dividend policy, and the expected term is equal
to the contractual life of the warrants.
As of
October 31, 2010, the Company had warrants as follows:
Warrants
Outstanding
|
Warrants
Exercisable
|
Weighted
Average Exercise
Price
|
Average
Remaining Contractual
Life
|
|||||||||||||
Balance,
October 31, 2008
|
3,975,714 | 3,975,714 | $ | 3.68 | 1.36 | |||||||||||
Granted
|
― | ― | ― | ― | ||||||||||||
Forfeited
|
― | ― | ― | ― | ||||||||||||
Exercised
|
― | ― | ― | ― | ||||||||||||
Balance,
October 31, 2009
|
3,975,714 | 3,975,714 | $ | 3.68 | 0.36 | |||||||||||
Granted
|
― | ― | ― | ― | ||||||||||||
Forfeited
|
(3,975,714 | ) | (3,975,714 | ) | ― | ― | ||||||||||
Exercised
|
― | ― | ― | ― | ||||||||||||
Balance,
October 31, 2010
|
― | ― | $ | ― | ― |
Note 12 – Accounting for Stock-Based
Compensation
PFGY Stock
Options
On
September 5, 2007, the Company adopted the “Perfectenergy International Limited
2007 Stock Incentive Plan” (the “Stock Incentive Plan”). The Company
reserved 1,500,000 shares of its common stock pursuant to the Stock Incentive
Plan. Options are generally vested on an annual basis over the three
years following the date of grant and expire after 10 years.
On April
7, 2010, the Company granted a total of 200,000 stock options to three
executives and four directors at $0.20 per share. The shares were valued at the
market price on the date of grant. The estimated fair value of stock options
granted was $0.19 per share. The fair value of the options was estimated on the
date of grant using a Black-Scholes Option Pricing model using the following
assumptions:
4/7/2010
|
|
Expected
volatility
|
170.0%
|
Risk-free
interest rate
|
2.98%
|
Expected
dividend
|
―
|
Expected
life
|
6.50
|
The
volatility of the Company’s common stock was estimated by management based on
the historical volatility of the Company’s common stock, the risk free interest
rate was based on Treasury Constant Maturity Rates published by the U.S. Federal
Reserve for periods applicable to the estimated life of the options, and the
expected dividend yield was based on the current and expected dividend policy.
The value of the options was based on the Company’s common stock price on the
date each option was granted. Because the Company does not have a history of
employee stock options, the estimated life is based on one-half of the sum of
the vesting period and the contractual life of each option. This is the same as
assuming that the options are exercised at the mid-point between the vesting
date and expiration date.
Stock-based
award activity was as follows:
Options
Outstanding
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic Value
|
||||||||||
Balance,
October 31, 2008
|
1,208,685 | $ | 2.93 | $ | ― | |||||||
Granted
|
― | ― | ― | |||||||||
Forfeited
|
― | ― | ― | |||||||||
Exercised
|
― | ― | ― | |||||||||
Balance,
October 31, 2009
|
1,208,685 | $ | 2.93 | $ | ― | |||||||
Granted
|
200,000 | 0.20 | ― | |||||||||
Forfeited
|
39,298 | 2.80 | ― | |||||||||
Exercised
|
― | ― | ― | |||||||||
Balance,
October 31, 2010
|
1,369,387 | $ | 2.54 | $ | ― |
As of
October 31, 2010, approximately $59,146 of estimated expense with respect to
non-vested stock-based awards has yet to be recognized and will be recognized as
an expense over the employee’s remaining weighted average service period of
approximately 1.5 years. As of October 31, 2010, 1,127,720 of
the outstanding options are exercisable. Compensation expenses for the years
ended October 31, 2010 and 2009 were $1,270,721 and $1,627,868,
respectively.
Stock-based
award as of October 31, 2010 is as follows:
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||
Number
of Options
|
Exercise
Price
|
Average
Remaining
Contractual
Life
|
Number
of Options
|
Exercise
Price
|
Average
Remaining
Contractual
Life
|
|||||||||||
|
|
|
|
|
||||||||||||
1,044,387
|
$
|
2.80
|
6.78
|
1,044,387
|
$
|
2.80
|
6.78
|
|||||||||
125,000
|
$
|
4.08
|
2.25
|
83,333
|
$
|
4.08
|
2.25
|
|||||||||
200,000
|
$
|
0.20
|
9.28
|
―
|
―
|
9.28
|
Note
13 – Statutory Reserves
The laws
and regulations of the PRC require that before an enterprise distributes profits
to its owners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations to investors, in proportions determined at
the discretion of the board of directors, after the statutory
reserve. The statutory reserve includes the surplus reserve fund and
the enterprise fund. The statutory reserve represents restricted
retained earnings.
Surplus Reserve
Fund
Pursuant
to the PRC’s accounting standards, Perfectenergy Shanghai and Perfectenergy
Solar-Tech are required to set aside 10% of their after-tax profit each year to
their general reserves until the accumulative amount of such general reserves
reaches 50% of their respective registered capital. These allocations
must be made before Perfectenergy Shanghai or Perfectenergy Solar-Tech can
distribute any cash dividends to each of their sole shareholder, Perfectenergy
BVI.
In
addition to using the funds in their surplus reserves to distribute cash
dividends to their shareholders, Perfectenergy Shanghai and Perfectenergy
Solar-Tech may also use such funds (i) during a liquidation, (ii) to cover a
previous years’ losses, if any, (iii) for business expansion, or (iv) for
conversion to registered capital by issuing new shares to existing shareholders
in proportion to their holdings, provided that the remaining surplus reserve
fund balance after such issue is not less than 25% of each of their registered
capital, or by increasing the par value of the shares currently held by existing
shareholders. For the years ended October 31, 2010 and 2009, neither
Perfectenergy Shanghai nor Perfectenergy Solar-Tech made any contribution to
their respective surplus reserve fund.
Enterprise
Fund
The
enterprise fund may be used to acquire plant and equipment or to increase
working capital to expand on production and business operations. No
minimum contribution is required, and neither Perfectenergy Shanghai nor
Perfectenergy Solar-Tech made any contributions to their respective enterprise
fund for the years ended October 31, 2010 and 2009.
Under the
income tax laws of the PRC, Chinese companies were generally subject to an
income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income reported in the statutory financial statements after
appropriate tax adjustments, unless the enterprise is located in a specially
designated region where enterprises are granted a three-year income tax
exemption and a 50% income tax reduction for the next three years or the
enterprise is a manufacturing related joint venture with a foreign enterprise or
a wholly owned subsidiary of a foreign enterprise, which are granted a two-year
income tax exemption and a 50% income tax reduction for the next three
years.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES’”) and Foreign Invested Enterprises
(“FIEs”). The key changes are as follows:
a.
|
The
new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES’ and FIEs, except for high tech companies that pay
a reduced rate of 15%; and
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of 5 years or
until the end of the tax holiday term, whichever is
sooner.
|
Perfectenergy
Shanghai was established on July 8, 2005 as a wholly owned subsidiary of the
Company, a foreign enterprise in the PRC. Thus, Perfectenergy
Shanghai was granted an income tax exemption for the years ended December 31,
2006 and 2005, was entitled to a 50% reduction of the income tax rate of 33% for
2007 (or a rate of 16.5%), and was entitled to a 50% reduction of the income tax
rate of 25% for 2008 and 2009 (or a rate of 12.5%).
On
January 1, 2008, Perfectenergy Shanghai received the high technology
certification from the tax authority. The certification allows the
Company to receive the 15% preferential income tax rate for a period of three
years from January 1, 2008 to December 31, 2010. Because of the lower
tax rate, the Company continued to follow the status of a foreign enterprise in
2009 and 2008. In 2010, the Company exercised and applied the 15%
preferential income tax rate.
The
following table reconciles the U.S. statutory tax rates to the Company’s
effective tax rate for the years ended October 31, 2010 and 2009:
Years
Ended
October
31,
|
||||||||
2010
|
2009
|
|||||||
U.S.
statutory rates
|
34.0 | % | 34.0 | % | ||||
Foreign
income not recognized in U.S.
|
(34.0 | ) | (34.0 | ) | ||||
China
income taxes
|
25.0 | 25.0 | ||||||
China
income tax exemption
|
(10.0 | ) | (12.5 | ) | ||||
Germany
income taxes
|
31.5 | 31.5 | ||||||
Germany
income tax exemption
|
(0.0 | ) | (0.0 | ) | ||||
Other
Item (a)
|
(71.1 | ) | (44.0 | ) | ||||
Effective
income tax rates
|
(24.6 | ) % | 0.0 | % |
(a)
|
These
rates differ from the stated effective tax rate in China mainly due to
losses incurred by the non-Chinese entities or other non-deductible
expenses that are not deductible in the PRC. In addition,
Perfectenergy Shanghai took a charge of approximately $1,868,000 to fully
reserve the advanced inventory payment and recorded intercompany
commission expenses of approximately $798,000. These charges,
attributed to 18% of the rate change, are non-deductible expenses for tax
purposes under the PRC tax
law.
|
Since
Perfectenergy Shanghai had an operating loss for the year ended October 31,
2009, the loss can be carried forward to offset income for the next five
years. The Company recorded non-current deferred tax assets of $0 and
$95,105 as of October 31, 2010 and 2009, respectively. The Company
believes that a valuation allowance is not deemed necessary for the deferred
assets for the following reasons: (i) there will be sufficient operating income
generated in future years based on the fact that the Company’s wholly owned
subsidiary, Perfectenergy Shanghai, is expected to generate profits based on
sales orders received for future periods, and (ii) the current operating loss of
Perfectenergy Shanghai can be carried forward for five years to offset future
operating income under PRC tax regulations.
The
estimated tax savings due to the reduced tax rate for the years ended October
31, 2010 and 2009 amounted to $195,381 and $126,519, respectively. There
was no material effect to loss per share if the statutory income tax had been
applied.
Perfectenergy
GmbH’s aggregated tax burden, including corporate income tax plus solidarity
surcharge and trade tax is 31.5%. The Company recorded non-current
deferred tax assets of $10,184 and $281,000 as of October 31, 2010 and 2009,
respectively. The Company believes that a valuation allowance is not
deemed necessary for the deferred assets as there will be sufficient operating
income generated in future years based on the fact that Perfectenergy GmbH is
expected to generate profits based on sales orders received for future
periods. German corporations will now be subject to limitation on the
utilization of loss carryforwards for corporation tax. This so-called minimum
tax is computed by allowing the first €1 million of net operating loss
carryforwards to offset taxable income. Any utilization above that threshold
will generally be limited to 60% of taxable income. There is no expiration date
for the net operating loss carryforwards. Under the prior law, German
corporations were able to offset 100% of their income with loss
carryforwards.
PFGY was
incorporated in the United States and has incurred net operating losses for
income tax purposes for the year 2010 and 2009. The estimated
accumulated net operating loss carryforwards for the U.S. income taxes amounted
to $397,000 and $397,000 as of October 31,2010 and 2009, respectively, which may
be available to reduce future years’ taxable income. These carryforwards will
expire, if not utilized, between 2027 and 2030. Management believes
that the realization of the benefits from these losses appears uncertain due to
the Company’s limited operating history and continuing losses for U.S. income
tax purposes. Accordingly, the Company has provided a 100% valuation allowance
on the deferred tax asset benefit to reduce the asset to zero. The
valuation allowance at October 31, 2010 was $135,000. Management will
review this valuation allowance periodically and make adjustments as
warranted.
The
Company did not have cumulative undistributed earnings of foreign subsidiaries
as of October 31, 2010. Should the Company have any undistributed
earnings, such earnings will be included in consolidated retained earnings and
will continue to be indefinitely reinvested in international
operations. No provision will be made for U.S. deferred taxes related
to future repatriation of these earnings, nor is it practicable to estimate the
amount of income taxes that would have to be provided if the Company concludes
that such earnings will be remitted in the future.
Taxes
Payables
Taxes
payables consisted of the following:
October
31,
2010
|
October
31,
2009
|
|||||||
Value
added taxes payable
|
$ | 2,978,218 | $ | 3,079,786 | ||||
Employee
individual income tax withheld
|
16,061 | 42,052 | ||||||
Income
tax payable
|
201,087 | - | ||||||
Total
|
$ | 3,195,366 | $ | 3,121,838 |
Note
15 – Concentration of Risk
Cash
Cash
includes cash on hand and demand deposits in accounts maintained with either
state owned banks or renowned local banks within the PRC, the United States,
Hong Kong, and Germany. Certain financial instruments, which subject
the Company to concentration of credit risk, consist of cash. The
Company maintains cash balances at financial institutions which, from time to
time, may exceed Federal Deposit Insurance Corporation insured limits for the
banks located in the United States, may exceed Hong Kong Deposit Protection
Board insured limits for the banks located in Hong Kong, or may exceed
Compensation Scheme of German Banks and Deposit Protection Fund of Association
of German Banks insured limits for the banks located in Germany (amounts up to
€1.5 million per depositor are fully protected in German
Banks). Balances at financial institutions or state owned banks
within the PRC are not covered by insurance. Total cash in banks at
which the Company’s deposits are not covered by insurance amounted to $1,170,245
and $1,347,547 at October 31, 2010 and 2009, respectively. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any risks on its cash in bank accounts.
Major
Customers
For the
years ended October 31, 2010 and 2009, five customers accounted for
approximately 64% and 74%, respectively,
of the Company’s sales. These customers accounted for approximately 47% and
59% of the
Company’s accounts receivable as of October 31, 2010 and 2009,
respectively.
Major
Vendors
For the
years ended October 31, 2010 and 2009, the Company purchased approximately 46%
and 61%,
respectively, of their raw materials from three major suppliers. These suppliers
represented 64% and 45% of the Company’s total accounts payable as of October
31, 2010 and 2009, respectively.
Political and Economic
Risk
The
Company's major operations are carried out in the PRC. Accordingly,
the Company’s business, financial condition, and results of operations may be
influenced by the political, economic, and legal circumstances in the PRC and by
the general state of the PRC's economy.
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among other
things, the political, economic, and legal environments and foreign currency
exchange. The Company’s results may be adversely affected by changes
in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Revenue by Geographic
Area
Revenues
are attributed to geographic areas based on the final shipping destination of
the Company’s products. Perfectenergy GmbH remains a sales branch and
does not maintain its own supply channel. The following table
summarizes the financial information for the Company’s revenues based on
geographic area:
Geographic
Area
|
Year
Ended
October
31,
|
|||||||
2010
|
2009
|
|||||||
China
|
$
|
4,341,814
|
$
|
2,666,300
|
||||
Germany
|
70,259,276
|
28,788,656
|
||||||
Total
revenues
|
$
|
74,601,090
|
$
|
31,454,956
|
Note 16 – Commitments
Operating Lease
Commitments
The
Company’s office lease for Perfectenergy Shanghai is under a five-year term
expiring May 31, 2011 with a monthly rent of approximately $17,000 (RMB
115,199). The Company entered into a three-year office lease for
Perfectenergy GmbH expiring November 30, 2010 with a monthly rent of
approximately $2,176 (approximately EUR 1,452). The Company entered
into a two-year lease for Perfectenergy Solar-Tech expiring March 14, 2010 with
a monthly rent of $5,900 (approximately RMB 40,000), the lease is extended up to
the end of 2010 based on oral agreement with the landlord. At October
31, 2010, total future minimum lease payments under an operating lease were as
follows:
Year
Ending October 31,
|
Amount
|
|||
2011
|
$
|
132,397
|
||
Thereafter
|
―
|
Total
rent expense for the years ended October 31, 2010 and 2009 amounted to $304,569
and $316,636, respectively.
Long-Term Silicon Supply
Agreements
On
January 8, 2010, Perfectenergy Shanghai entered into a long-term supply contract
with Chengdu Jiayang Silicon Materials Technology Co., Ltd. (“Chengdu”) under
which Perfectenergy Shanghai must purchase from Chengdu $1 million silicon
wafers in 2010, $1.2 million silicon wafers in 2011, and $1.5 million silicon
wafers in 2012. Due to fluctuations in the silicon supply market, the
purchasing price of these silicon wafers will be based on market
conditions.
F-25
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are
no reportable disagreements with our independent auditors independent auditors,
Frazer Frost, LLP (successor entity of Moore
Stephens Wurth Frazer and Torbet, LLP).
Disclosure
Controls and Procedures
Regulations
under the Securities Exchange Act of 1934, as amended, require public companies
to maintain “disclosure controls and procedures,” which are defined to mean a
company’s controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized, and reported, within
the time periods specified in the SEC’s rules and forms. Our Chief
Executive Officer (principal executive officer) and Chief Financial Officer
(principal financing officer) carried out an evaluation of the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on those evaluations, as of October 31, 2010, our
Chief Executive Officer and Chief Financial Officer believe that:
|
(i)
|
our disclosure controls and
procedures are designed to ensure that information required to be
disclosed by us in the reports we file under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in
the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure;
and
|
|
(ii)
|
our disclosure controls and
procedures are ineffective due to the material weaknesses described below
under “Management’s annual report on internal control over financial
reporting.”
|
Notwithstanding
management’s assessment that our internal control over financial reporting was
ineffective as of October 31, 2010 due to the material weaknesses described
below under “Management’s annual report on internal control over financial
reporting, ” we believe that the consolidated financial statements included in
this annual report on Form 10-K correctly present our financial condition,
results of operations, and cash flows for the fiscal years covered by such
statements in all material respects.
Internal
Control over Financial Reporting
(a)
Management’s annual report on
internal control over financial reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the supervision of,
the Company’s principal executive officer and principal financial officer and
effected by the Company’s board of directors, management, and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
|
·
|
Pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the
Company;
|
|
·
|
Provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company;
and
|
|
·
|
Provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the Company’s assets that could have a material effect
on the financial statements.
|
Because
of its inherent limitations, the Company’s internal control over financial
reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and
presentation. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of October 31, 2010. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework.
17
Based on
that evaluation, our management concluded that our internal control over
financial reporting is not effective, as of October 31, 2010, as management
identified the following material weaknesses in our financial statement
reporting process:
|
(i)
|
Lack of sufficient communications
between our headquarters in Shanghai and our German subsidiary for timely
resolutions on daily accounting issues and deficiencies in controls of
financial reporting process;
and
|
|
(ii)
|
Lack of sufficient U.S. GAAP
knowledge including experience and skills for the accurate accounting of
different business issues.
|
Our
management believes that the material weaknesses identified above were the
direct result of a continued significant increase in operating activities during
the 2010 fiscal year. We have taken the following measures to
remediate these material weaknesses:
|
(i)
|
Developed a rigorous process of
communications between all persons involved in the financial reporting
process and improved the quality of reviewing of financial
statements;
|
|
(ii)
|
Hired
and outsourced additional financial reporting and accounting personnel
with relevant account experience, skills, and knowledge in the preparation
of financial statements under the requirements of U.S. GAAP and financial
reporting disclosure pursuant to SEC rules;
and
|
|
(iii)
|
Provided
additional training and cross-training to our existing personnel,
including in the areas of new and emerging accounting
standards.
|
We plan
on continuing to identify and implement remedial measures.
(b) Changes
in internal control over financial reporting
During
our last fourth fiscal quarter, we implemented the measures described in (i)
through (iii) above in our internal control over financial reporting in
connection with the evaluation required by Rule 13a-15(d) or
Rule15d-15(d) promulgated under the Exchange Act , which have materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART III
Current
Management
Set forth
below is a summary of our executive officers’ and directors’ business experience
for the past 5 years. The experience and background of each of the directors, as
summarized below, were significant factors in their previously being nominated
as directors of the Company.
Xiaolin Zhuang, 39, has been
our Chief Financial Officer and Secretary since February 1, 2008. His
term of office with the Company ends on January 31, 2011. Concurrent to
these positions, Mr. Zhuang serves as the Chief Financial Officer of our
subsidiary, Perfectenergy Shanghai, since February 2008. Prior to
joining the Company, Mr. Zhuang served as the China Financial Controller of
Synthesis Energy Systems, Inc. from April 2007 to January 2008. From
November 2003 to May 2007, Mr. Zhuang served as the Finance Manager and Group
Internal Auditor Head for Jebsen & Co. (China) Ltd. & Jebsen & Co.
Ltd. Since September 1995, Mr. Zhuang has served as a member of the
China Institute of Certified Public Accountants (CICPA). Mr. Zhuang
earned a bachelor’s degree in Economics in 1994 from the Shanghai University of
Finance and Economics.
18
Diping Zhou, 43, has been our
Vice President of Operations since September 1, 2008. Her current
term ends on September 1, 2012. Ms. Zhou has extensive accounting
experience, and prior to her current position, she served as our Chief
Accounting Officer, Treasurer, and Secretary since August 8,
2007. Concurrent to her position with the Company, she also serves as
Vice President and an accountant for Perfectenergy Shanghai. From
2002 through 2005, Ms. Zhou was the manager of budget and financial department
in Topsolar Shanghai Limited, a leading Chinese solar energy products
manufacturer. Ms. Zhou received a bachelor’s degree in Accounting
from Shanghai Lixin University of Commerce in 1988. Ms. Zhou has
extensive accounting experience.
Min Fan, 45, has been a director since
August 25, 2007, and he is up for re-election to the Board at our 2011 annual
stockholder meeting. Mr. Fan is one of the co-founders of Ctrip.com
International Ltd. (Nasdaq: CTRP), a Chinese-based travel services
business. He has served as CTRP’s Chief Executive Officer since
January 2006 and as a director since October 2006. He also served as
CTRP’s Chief Operating Officer from November 2004 to January 2006, and as CTRP’s
Executive Vice President from 2000 to November 2004. Mr. Fan is also
a founding stockholder of Home Inns & Hotels Management, Inc. (Nasdaq:
HMIN), an economy hotel developer, operator, and
franchisor. Mr. Fan obtained a master’s and bachelor’s degree
from Shanghai Jiao Tong University, and studied at the Lausanne Hotel Management
School of Switzerland in 1995.
Yunxia Yang, 53, has been a director since
August 25, 2007, and she is up for re-election to the Board at our 2011 annual
stockholder meeting. Ms. Yang is one China’s leading solar energy
researchers with extensive experience in solar products development and has been
a professor in the School of Materials Science and Engineering at the East China
University of Science & Technology since 1987. Ms. Yang received
her bachelor’s degree in 1982 and a master’s degree in 1987 in the study of
Materials, both from East China University of Science &
Technology.
Adam Roseman, 32, has been a director since
August 25, 2007, and he is up for re-election to the Board at our 2011 annual
stockholder meeting. Mr. Roseman has extensive experience in finance
and management. He is the founder and Chief Executive Officer of ARC
Investment Partners, LLC and ARC China, Inc. Previously, Mr. Roseman
was an investment banker in various sectors at Lehman Brothers, Piper Jaffray,
and Goldman Sachs. During the past five years, Mr. Roseman has also
sat on the Boards of Directors of Big Brothers Big Sisters Los Angeles and Big
Brothers Big Sisters Orange County.
Yajun Wu, 51, has been a director
since November 20, 2007, and he is up for re-election to the Board at our 2011
annual stockholder meeting. Mr. Wu serves as the Executive Vice
President and Deputy Chief Financial Officer of Alcatel Shanghai Bell Co., Ltd.
in Shanghai, a position that he has held since February 2003. From
July 2002 to February 2003, he was Alcatel’s Director of Credit
Management. From March 1999 to July 2002, Mr. Wu served as Vice
President and Deputy Chief Financial Officer of Shanghai Bell Alcatel Mobile
Communication System Co., Ltd.
Family
Relationships
There are
no family relationships between or among any of the current directors, executive
officers, or persons nominated or charged by the Company to become directors or
executive officers.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten years:
·
|
Had
any petition under the federal bankruptcy laws or any state insolvency law
filed by or against, or had a receiver, fiscal agent, or similar officer
appointed by a court for the business or property of such person, or any
partnership in which he was a general partner at or within two years
before the time of such filing, or any corporation or business association
of which he was an executive officer at or within two years before the
time of such filing;
|
·
|
Been
convicted in a criminal proceeding or a named subject of a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
|
·
|
Been
the subject of any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining him from, or otherwise limiting, the following
activities:
|
(i)
|
Acting
as a futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity Futures Trading
Commission, or an associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in or
continuing any conduct or practice in connection with such
activity;
|
(ii)
|
Engaging
in any type of business practice;
or
|
(iii)
|
Engaging
in any activity in connection with the purchase or sale of any security or
commodity or in connection with any violation of federal or state
securities laws or federal commodities
laws;
|
19
·
|
Been
the subject of any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any federal or state authority barring,
suspending, or otherwise limiting for more than 60 days the right of such
person to engage in any activity described in (i) above, or to be
associated with persons engaged in any such
activity;
|
·
|
Been
found by a court of competent jurisdiction in a civil action or by the SEC
to have violated any federal or state securities law, where the judgment
in such civil action or finding by the SEC has not been subsequently
reversed, suspended, or vacated; or
|
·
|
Been
found by a court of competent jurisdiction in a civil action or by the
Commodity Futures Trading Commission to have violated any federal
commodities law, where the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended, or vacated;
|
·
|
Been
the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation
of:
|
(i)
|
Any
federal or state securities or commodities law or regulation;
or
|
(ii)
|
Any
law or regulation respecting financial institutions or insurance companies
including, but not limited to, a temporary or permanent injunction, order
of disgorgement or restitution, civil money penalty or temporary or
permanent cease-and-desist order, or removal or prohibition order;
or
|
(iii)
|
Any
law or regulation prohibiting mail or wire fraud or fraud in connection
with any business entity; or
|
·
|
Been
the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any
registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons
associated with a member.
|
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Exchange Act requires our executive officers, directors, and
persons who beneficially own more than 10% of a registered class of our equity
securities to file with the SEC initial statements of beneficial ownership,
reports of changes in ownership, and annual reports concerning their ownership
of our common shares and other equity securities on Forms 3, 4, and 5,
respectively. Executive officers, directors, and greater than 10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file. Based on a review of the copies of
such forms received by us, and to the best of our knowledge, no required reports
during the fiscal year ended October 31, 2010 were untimely filed by any
executive officer, director, or greater than 10% stockholder.
Code
of Ethics
We have
adopted a Code of Business Conduct and Ethics that applies to our executive
officers, directors, and employees, which code is attached to our annual report
on Form 10-K filed with the SEC on January 26, 2009. A copy of our
code of ethics will also be provided to any person without charge upon written
request sent to us at our offices.
Material
Changes to the Procedures by which Security Holders may Recommend Nominees to
the Board
There
have been no material changes to the procedures by which our security holders
may recommend nominees to the Board of Directors.
Audit
Committee; Audit Committee Financial Expert
We formed
an Audit Committee of our board of directors and approved the charter for such
committee on July 29, 2008. The members of our Audit Committee are
Yajun Wu, Adam Roseman, and Yunxia Yang. Mr. Wu is the Audit
Committee’s Chairman, and he is an independent member of the board, as defined
by the SEC and the Nasdaq Listing Rules. The board of directors has
determined that Mr. Wu is also an “audit committee financial expert” as defined
by SEC rules.
ITEM
11. EXECUTIVE COMPENSATION.
The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended October 31, 2010, 2009,
and 2008 by (i) our Chief Executive Officer (principal executive officer), (ii)
our Chief Financial Officer (principal financial officer), (iii) the three most
highly compensated executive officers other than our CEO and CFO who were
serving as executive officers at the end of our last completed fiscal year whose
total compensation exceeded $100,000 during such fiscal year ends, and (iv) up
to two additional individuals for whom disclosure would have been provided but
for the fact that the individual was not serving as an executive officer at the
end of our last completed fiscal year whose total compensation exceeded $100,000
during such fiscal year ends. The compensation amounts reflected in
the table below are expressed in U.S. Dollars based on the interbank exchange
rate of RMB6.6 for each 1.00 U.S. Dollar, on October 31, 2010.
20
SUMMARY COMPENSATION
TABLE
Name and
principal
position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
(1) |
Non-Equity
Incentive
Compensa-
tion
|
Non-qualified
Deferred
Compensa-
tion
Earnings
|
All Other
Compen-
sation
|
Total
|
|||||||||||||||||||||||||
Wennan
Li,
|
2010
|
$
|
115,636
|
$
|
34,848
|
$
|
―
|
$
|
437,238
|
(2,3)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
587,722
|
||||||||||||||||
CEO
|
2009
|
$
|
105,400
|
$
|
8,800
|
$
|
―
|
$
|
565,576
|
(3)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
679,776
|
||||||||||||||||
2008
|
$
|
106,618
|
$
|
―
|
$
|
―
|
$
|
567,125
|
(3)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
673,743
|
|||||||||||||||||
Xiaolin
|
2010
|
$
|
96,364
|
$
|
21,969
|
$
|
$
|
110,367
|
(4,5)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
228,700
|
|||||||||||||||||
Zhuang,
|
2009
|
$
|
87,478
|
$
|
7,320
|
$
|
―
|
$
|
109,274
|
(5)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
204,072
|
||||||||||||||||
CFO
|
2008
|
$
|
66,176
|
$
|
―
|
$
|
―
|
$
|
81,731
|
(5)
|
$
|
―
|
$
|
―
|
$
|
4,320
|
(6)
|
$
|
152,227
|
|||||||||||||||
Diping
Zhou,
|
2010
|
$
|
96,364
|
$
|
21,969
|
$
|
―
|
$
|
211,158
|
(7,8)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
329,491
|
||||||||||||||||
VP
of
|
2009
|
$
|
82,090
|
$
|
7,060
|
$
|
―
|
$
|
274,861
|
(8)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
364,011
|
||||||||||||||||
Operations
|
2008
|
$
|
74,265
|
$
|
―
|
$
|
―
|
$
|
273,609
|
(8)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
347,874
|
(1)
|
Reflects dollar amount expensed by the Company during the applicable fiscal year for financial statement reporting purposes pursuant to FAS 123R. FAS 123R requires the Company to determine the overall value of the options as of the date of grant based upon the Black-Scholes method of valuation, and to then expense that value over the service period over which the options become exercisable (vested). As a general rule, for time in service based options, the Company will immediately expense any option or portion thereof that is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. |
(2)
|
On April 7, 2010, Mr. Li was granted options to purchase an aggregate 50,000 shares of our common stock at $0.20 per share, vesting at 33.33% per year. These options expire on April 7, 2020. The shares were valued at the market price on the date of grant. The estimated fair value of stock options granted was $0.19 per share. We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 170%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 2.98%. Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option. This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date. |
(3)
|
On August 8, 2007, Mr. Li was
granted options to purchase an aggregate 407,274 shares of our common
stock at $2.80 per share, vesting at 33.33% per year. These
options expire on August 8, 2017. We used the
Cox-Ross-Rubinstein binomial model to value the options at the time they
were issued, based on volatility of 70%, dividend yield of 0%, the stated
exercise prices, and expiration dates of the instruments and using an
average risk-free rate of 4.5%. Because we do not have a
history of employee stock options, the estimated life is based on one-half
of the sum of the vesting period and the contractual life of 10 years of
the option. This is the same as assuming that the options are
exercised at the mid-point between the vesting date and expiration
date.
|
(4)
|
On
April 7, 2010, Mr. Zhuang was granted options to purchase an aggregate
30,000 shares of our common stock at $0.20 per share, vesting at 33.33%
per year. These options expire on April 7, 2020. The
shares were valued at the market price on the date of
grant. The estimated fair value of stock options granted was
$0.19 per share. We used the Cox-Ross-Rubinstein binomial model
to value the options at the time they were issued, based on volatility of
170%, dividend yield of 0%, the stated exercise prices, and expiration
dates of the instruments and using an average risk-free rate of
2.98%. Because we do not have a history of employee stock
options, the estimated life is based on one-half of the sum of the vesting
period and the contractual life of 10 years of the option. This
is the same as assuming that the options are exercised at the mid-point
between the vesting date and expiration
date.
|
(5)
|
On February 1, 2008, Mr. Zhuang
was granted options to purchase an aggregate 125,000 shares of our common
stock at $4.08 per share, vesting at 33.33% per year. These
options expire on February 1, 2013. We used the
Cox-Ross-Rubinstein binomial model to value the options at the time they
were issued, based on volatility of 70%, dividend yield of 0%, the stated
exercise prices, and expiration dates of the instruments and using an
average risk-free rate of 2.36%. Because we do not have a
history of employee stock options, the estimated life is based on one-half
of the sum of the vesting period and the contractual life of 5 years of
the option. This is the same as assuming that the options are
exercised at the mid-point between the vesting date and expiration
date.
|
(6)
|
This amount includes statutory
benefits under PRC laws, including pension, housing, medical, and
unemployment insurance
benefits.
|
21
(7)
|
On
April 7, 2010, Ms. Zhou was granted options to purchase an aggregate
30,000 shares of our common stock at $0.20 per share, vesting at 33.33%
per year. These options expire on April 7, 2020. The
shares were valued at the market price on the date of
grant. The estimated fair value of stock options granted was
$0.19 per share. We used the Cox-Ross-Rubinstein binomial model
to value the options at the time they were issued, based on volatility of
1.70%, dividend yield of 0%, the stated exercise prices, and expiration
dates of the instruments and using an average risk-free rate of
2.98%. Because we do not have a history of employee stock
options, the estimated life is based on one-half of the sum of the vesting
period and the contractual life of 10 years of the option. This
is the same as assuming that the options are exercised at the mid-point
between the vesting date and expiration
date.
|
(8)
|
On August 8, 2007, Ms. Zhou was
granted options to purchase an aggregate 196,488 shares of our common
stock at $2.80 per share, vesting at 33.33% per year. These
options expire on August 8, 2017. We used the
Cox-Ross-Rubinstein binomial model to value the options at the time they
were issued, based on volatility of 70%, dividend yield of 0%, the stated
exercise prices, and expiration dates of the instruments and using an
average risk-free rate of 4.5%. Because we do not have a
history of employee stock options, the estimated life is based on one-half
of the sum of the vesting period and the contractual life of 10 years of
the option. This is the same as assuming that the options are
exercised at the mid-point between the vesting date and expiration
date.
|
Grants
of Plan-Based Awards
There
were no plan-based awards granted during the year ended October 31, 2010 to any
named executive officer.
Employment
Agreements
The
Company entered into an Amended and Restated Employment Agreement with Xiaolin
Zhuang on December 29, 2008 for his services as Chief Executive Officer, which
agreement restated the Employment Agreement between Mr. Zhuang and Perfectenergy
Shanghai dated February 1, 2008 and the compensation terms of which were amended
on April 7, 2010. Mr. Zhuang’s base salary, beginning November 1,
2009, is RMB53,000 (approximately US$7,764) per month, and his bonus
compensation arrangement for the fiscal year ended October 31, 2010 was a
portion of an aggregate 10% of any net profits realized by the Company during
the same fiscal year, with a minimum guaranteed aggregate bonus payment of
US$75,000. The aggregate bonus was to be paid to Mr. Zhuang, Wennan
Li, and Diping Zhou, and Mr. Zhuang’s portion of the aggregate bonus payment was
$14,393. Pursuant to the employment agreement, Mr. Zhuang was issued
options to purchase 125,000 shares of the Company’s common stock at $4.08 per
share under the Company’s 2007 Stock Incentive Plan. The options were
granted on February 1, 2008 and expire on February 1, 2013, and they vest
according to the following schedule: one-third on each of the first, second, and
third anniversary of the grant date. In the event of termination, all
vested options must be exercised within six months of the termination
date. If the Company terminates Mr. Zhuang’s employment due to (i)
Mr. Zhuang’s inability to perform his duties after medical treatment for a
non-work related illness, (ii) Mr. Zhuang’s inability or incompetence to perform
his duties, (iii) a major change in circumstances that were relied on as a basis
to entering into the employment agreement, including a merger, division, or
acquisition of the Company, or (iv) the Company’s statutory reorganization or
major financial difficulties, Mr. Zhuang is entitled to one months’ salary for
each year of service. The employment agreement terminates on
February 1, 2011, and it may be renewed upon mutual agreement by the
parties.
The
Company entered into an Employment Agreement with Wennan Li, which became
effective on September 2, 2008, for his services as the Company’s Chief
Executive Officer, the compensation terms of which were amended on April 7,
2010. Mr. Li’s base salary, beginning November 1, 2009, is RMB63,600
(approximately US$9,317) per month, and his bonus compensation arrangement for
the fiscal year ended October 31, 2010 was a portion of an aggregate 10% of any
net profits realized by the Company during the same fiscal year, with a minimum
guaranteed aggregate bonus payment of US$75,000. The aggregate bonus
was to be paid to Mr. Li, Xiaolin Zhuang, and Diping Zhou, and Mr. Li’s portion
of the aggregate bonus payment was $25,757. The employment agreement expires on
September 1, 2012.
The
Company entered into an Employment Agreement with Diping Zhou, which became
effective on September 2, 2008, for her services as the Company’s Vice President
of Operations, the compensation terms of which were amended on April 7,
2010. Ms. Zhou’s base salary, beginning November 1, 2009, is RMB53,00
(approximately US$7,764) per month, and her bonus compensation arrangement for
the fiscal year ended October 31, 2010 was a portion of an aggregate 10% of any
net profits realized by the Company during the same fiscal year, with a minimum
guaranteed aggregate bonus payment of US$75,000. The aggregate bonus
was to be paid to Ms. Zhou, Wennan Li, and Xiaolin Zhuang, and Ms. Zhou’s
portion of the aggregate bonus payment was $14,393. The employment
agreement expires on September 1, 2012.
22
Outstanding
Equity Awards as of October 31, 2010
Option
Awards
|
Stock
Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable |
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable |
Equity
Incentive Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price ($) |
Option
Expiration
Date |
Number
of Shares or Units of Stock That Have Not Vested (#) |
Market
Value
of
Shares or
Units of
Stock
That
Have Not
Vested ($) |
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units,
or
Other
Rights
That
Have Not Vested (#) |
Equity
Incentive
Plan Awards:
Market or
Payout Value
of
Unearned
Shares, Units, or Other Rights That Have Not Vested (#) |
||||||||||||||||||||||||
Wennan
Li
|
407,274 | (1) | 0 | (1) | ― | $ | 2.80 |
8/8/17
|
― | ― | ― | ― | |||||||||||||||||||||
Wennan
Li
|
0 | (3) | 50,000 | (3) | ― | $ | 0.20 |
4/7/20
|
― | ― | ― | ― | |||||||||||||||||||||
Xiaolin
Zhuang
|
83,333 | (2) | 41,667 | (2) | ― | $ | 4.08 |
2/1/13
|
― | ― | ― | ― | |||||||||||||||||||||
Xiaolin
Zhuang
|
0 | (3) | 30,000 | (3) | ― | $ | 0.20 |
4/7/20
|
― | ― | ― | ― | |||||||||||||||||||||
Diping
Zhou
|
196,488 | (1) | 0 | (1) | ― | $ | 2.80 |
8/8/17
|
― | ― | ― | ― | |||||||||||||||||||||
Diping
Zhou
|
0 | (3) | 30,000 | (3) | ― | $ | 0.20 |
4/7/20
|
― | ― | ― | ― |
(1)
|
33.33%
of these options vested on August 8, 2008, August 8, 2009, and August 8,
2010.
|
(2)
|
33.33%
of these options vest(ed) on February 1, 2009, February 1, 2010, and
February 1, 2011.
|
(3)
|
33.33%
of these options vest on April 7, 2011, April 7, 2012, and April 7,
2013.
|
Director
Compensation
The
following table provides compensation information for our directors during the
fiscal year ended October 31, 2010:
Name
|
Fees
Earned or
Paid in
Cash ($)
|
Stock
Awards ($)
|
Option
Awards ($)
(1)
|
Non-Equity
Incentive Plan
Compensation ($)
|
Non-Qualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($) |
Total ($)
|
|||||||||||||||||||||
Wennan
Li (2)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
―
|
||||||||||||||
|
||||||||||||||||||||||||||||
Min
Fan
|
$
|
15,150
|
$
|
―
|
$
|
55,481
|
(3)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
70,631
|
|||||||||||||
|
||||||||||||||||||||||||||||
Yunxia
Yang
|
$
|
15,150
|
$
|
―
|
$
|
55,481
|
(4)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
70,631
|
|||||||||||||
|
||||||||||||||||||||||||||||
Adam
Roseman
|
$
|
60,000
|
$
|
―
|
$
|
264,061
|
(5)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
324,061
|
|||||||||||||
|
||||||||||||||||||||||||||||
Yajun
Wu
|
$
|
15,150
|
$
|
―
|
$
|
55,481
|
(6)
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
70,631
|
(1)
|
Reflects
dollar amount expensed by the Company during applicable fiscal year for
financial statement reporting purposes pursuant to FAS
123R. FAS 123R requires the Company to determine the overall
value of the options as of the date of grant based upon the Black-Scholes
method of valuation, and to then expense that value over the service
period over which the options become exercisable (vested). As a
general rule, for time in service based options, the company will
immediately expense any option or portion thereof which is vested upon
grant, while expensing the balance on a pro rata basis over the remaining
vesting term of the option.
|
(2)
|
Mr.
Li’s compensation as a director is reflected in the table titled “Summary
Compensation Table” above.
|
(3)
|
On
August 8, 2007, we issued options to Mr. Fan for the purchase of an
aggregate 50,000 shares of our common stock, which options have an
exercise price of $2.80 per share, vested at 33.33% on each one-year
anniversary following the grant date, and expire on August 8,
2017. We used the Cox-Ross-Rubinstein binomial model to value
these options at the time they were issued, based on volatility of 70%,
dividend yield of 0%, the stated exercise price, and expiration date of
the instruments and using an average risk-free rate of
4.5%. Because we do not have a history of employee stock
options, the estimated life is based on one-half of the sum of the vesting
period and the contractual life of 10 years of the option. This
is the same as assuming that the options are exercised at the mid-point
between the vesting date and expiration
date.
|
Additionally,
on April 7, 2010, we issued options to Mr. Fan for the purchase of an aggregate
30,000 shares of our common stock, which options have an exercise price of $0.20
per share, vest at 33.33% on each one-year anniversary, and expire on April 7,
2020. The shares were valued at the market price on the date of
grant. The estimated fair value of these options was $0.19 per
share. We used the Cox-Ross-Rubinstein binomial model to value the
options at the time they were issued, based on the volatility of 170%, dividend
yield of 0%, the stated exercise price, and expiration date of the instrument
and using an average risk-free rate of 2.98%. Because we do not have
a history of employee stock options, the estimated life is based on one-half of
the sum of the vesting period and the contractual life of 10 years of the
option. This is the same as assuming that the options are exercised
at the mid-point between the vesting date and expiration date.
(4)
|
On
August 8, 2007, we issued options to Ms. Yang for the purchase of an
aggregate 50,000 shares of our common stock, which options have an
exercise price of $2.80 per share, vested at 33.33% on each one-year
anniversary following the grant date, and expire on August 8,
2017. We used the Cox-Ross-Rubinstein binomial model to value
these options at the time they were issued, based on volatility of 70%,
dividend yield of 0%, the stated exercise price, and expiration date of
the instruments and using an average risk-free rate of
4.5%. Because we do not have a history of employee stock
options, the estimated life is based on one-half of the sum of the vesting
period and the contractual life of 10 years of the option. This
is the same as assuming that the options are exercised at the mid-point
between the vesting date and expiration
date.
|
Additionally,
on April 7, 2010, we issued options to Ms. Yang for the purchase of an aggregate
30,000 shares of our common stock, which options have an exercise price of $0.20
per share, vest at 33.33% on each one-year anniversary, and expire on April 7,
2020. The shares were valued at the market price on the date of
grant. The estimated fair value of these options was $0.19 per
share. We used the Cox-Ross-Rubinstein binomial model to value the
options at the time they were issued, based on the volatility of 170%, dividend
yield of 0%, the stated exercise price, and expiration date of the instrument
and using an average risk-free rate of 2.98%. Because we do not have
a history of employee stock options, the estimated life is based on one-half of
the sum of the vesting period and the contractual life of 10 years of the
option. This is the same as assuming that the options are exercised
at the mid-point between the vesting date and expiration
date.
23
(5)
|
Mr.
Roseman had options to purchase an aggregate 240,625 shares of our common
stock outstanding as of October 31, 2010. We used the Cox-Ross-Rubinstein
binomial model to value the options at the time they were issued, based on
volatility of 70%, dividend yield of 0%, the stated exercise price, and
expiration date of the instruments and using an average risk-free rate of
4.5%. Because we do not have a history of employee stock
options, the estimated life is based on one-half of the sum of the vesting
period and the contractual life of 10 years of the option. This
is the same as assuming that the options are exercised at the mid-point
between the vesting date and expiration
date.
|
(6)
|
On
August 8, 2007, we issued options to Mr. Wu for the purchase of an
aggregate 50,000 shares of our common stock, which options have an
exercise price of $2.80 per share, vested at 33.33% on each one-year
anniversary following the grant date, and expire on August 8,
2017. We used the Cox-Ross-Rubinstein binomial model to value
these options at the time they were issued, based on volatility of 70%,
dividend yield of 0%, the stated exercise price, and expiration date of
the instruments and using an average risk-free rate of
4.5%. Because we do not have a history of employee stock
options, the estimated life is based on one-half of the sum of the vesting
period and the contractual life of 10 years of the option. This
is the same as assuming that the options are exercised at the mid-point
between the vesting date and expiration
date.
|
Additionally,
on April 7, 2010, we issued options to Mr. Wu for the purchase of an aggregate
30,000 shares of our common stock, which options have an exercise price of $0.20
per share, vest at 33.33% on each one-year anniversary, and expire on April 7,
2020. The shares were valued at the market price on the date of
grant. The estimated fair value of these options was $0.19 per
share. We used the Cox-Ross-Rubinstein binomial model to value the
options at the time they were issued, based on the volatility of 170%, dividend
yield of 0%, the stated exercise price, and expiration date of the instrument
and using an average risk-free rate of 2.98%. Because we do not have
a history of employee stock options, the estimated life is based on one-half of
the sum of the vesting period and the contractual life of 10 years of the
option. This is the same as assuming that the options are exercised
at the mid-point between the vesting date and expiration
date.
We
compensate Min Fan, Yunxia Yang, and Yajun Wu with RMB100,000 (approximately
$14,640) per annum each for their services as a director. On November 29, 2007,
Mr. Fan, Ms. Yang, and Mr. Wu each received options to purchase 50,000 shares of
our common stock at $2.80 per share, of which 33.33% vested on the first,
second, and third year anniversary of the grant date of such options. On April
7, 2010, Mr. Fan, Ms. Yang, and Mr. Wu each received options to purchase 30,000
shares of our common stock at $0.20 per share, of which 33.33% vest on the
first, second, and third year anniversary of the grant date of such
options.
We are
party to a written three-year agreement with Adam Roseman that expired on
December 20, 2010 for his services as a director, under which he received $5,000
per month as compensation for his services. On November 29, 2007, Mr.
Roseman received options to purchase 250,000 shares of our common stock at $2.80
per share, of which 30% vested on the grant date and 70% vests on a monthly
basis over a period of two years from the grant date. Mr. Roseman is
entitled to certain travel and administrative expenses in connection with his
services as a director and is provided liability insurance. Although
the written agreement expired, we orally agreed with Mr. Roseman that the terms
would remain while w are negotiating a renewal of such agreement.
Compensation
Committee Interlocks and Insider Participation
During
the fiscal year ended October 31, 2010, our Compensation Committee was comprised
of Min Fan, Wennan Li, and Yunxia Yang. Mr. Fan serves as the
Chairman of the Compensation Committee. During the fiscal year ended
October 31, 2010, Mr. Li also served as an executive officer of the
Company.
During
the fiscal year ended October 31, 2010:
(i)
|
none
of our executive officers served as a member of the compensation committee
(or other board committee performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of another
entity, one of whose executive officers served on our Compensation
Committee;
|
(ii)
|
none
of our executive officers served as a director of another entity, one of
whose executive officers served on our Compensation Committee;
and
|
(iii)
|
none
of our executive officers served as a member of the compensation committee
(or other board committee performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of another
entity, one of whose executive officers served as a member of our Board of
Directors.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
Securities
Authorized for Issuance under Equity Compensation Plans
Please
see the section titled “Securities Authorized for Issuance under Equity
Compensation Plans” under Item 5 above.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the beneficial ownership of our
common stock as of January 10, 2011 for each of our directors and officers; all
directors and officers as a group; and each person known by us to beneficially
own five percent or more of our common stock.
24
Beneficial
ownership is determined in accordance with SEC rules. Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the shareholder’s name. Unless otherwise indicated, the
address of each beneficial owner listed below is No. 479 You Dong Road,
Xinzhuang Town, Shanghai 201100, People’s Republic of China.
Name
of Beneficial Owner and Address
|
Number of Shares of
Common Stock Beneficially
Owned (1)
|
Percent of Shares
of
Common Stock
Beneficially Owned (1)(2)
|
||||||
Executive
Officers and/or Directors:
|
||||||||
Wennan
Li
|
6,802,493
|
(3)
|
22.65
|
%
|
||||
Min
Fan
|
4,117,600
|
(4)
|
13.87
|
%
|
||||
Yunxia
Yang
|
4,117,600
|
(5)
|
13.87
|
%
|
||||
Diping
Zhou
|
267,976
|
(6)
|
*
|
|||||
Xiaolin
Zhuang
|
125,000
|
(7)
|
*
|
|||||
Adam
Roseman (8)
|
265,625
|
(8)
|
*
|
|||||
Yajun
Wu
|
50,000
|
(9)
|
*
|
|||||
All
Executive Officers and Directors as a Group
(7 persons)
|
15,746,294
|
53.82
|
%
|
* Less
than 1%
(1)
|
Under
Rule 13d-3, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes
the power to vote, or to direct the voting of shares; and (ii) investment
power, which includes the power to dispose or direct the disposition of
shares. Certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares (for example, upon exercise of an option) within 60
days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned
by such person (and only such person) by reason of these acquisition
rights. As a result, the percentage of outstanding shares of
any person as shown in this table does not necessarily reflect the
person's actual ownership or voting power with respect to the number of
shares of common stock actually
outstanding.
|
(2)
|
The
percentage of class beneficially owned is based on 29,626,916 shares of
common stock outstanding on January 10,
2011.
|
(3)
|
407,274
of these shares represent the number of shares of common stock that Wennan
Li has the right to acquire upon exercise of an option granted on August
8, 2007.
|
(4)
|
50,000
of these shares represent the number of shares of common stock that Min
Fan has the right to acquire upon exercise of an option granted on August
8, 2007.
|
(5)
|
50,000
of these shares represent the number of shares of common stock that Yunxia
Yang has the right to acquire upon exercise of an option granted on August
8, 2007.
|
(6)
|
196,488
of these shares represent the number of shares of common stock that Diping
Zhou has the right to acquire upon exercise of an option granted on August
8, 2007.
|
(7)
|
All
of these shares represent the number of shares of common stock Xiaolin
Zhuang has the right to acquire upon exercise of an option granted on
February 1, 2008.
|
(8)
|
240,625
of these shares represent the number of shares of common stock that Adam
Roseman has the right to acquire upon exercise of an option granted on
August 8, 2007. 25,000 of these shares are held in the name of
Tapirdo Enterprises, LLC, of which Mr. Roseman is the manager and sole
member. Mr. Roseman’s address is 9440 Little Santa Monica Blvd., Suite
401, Beverly Hills, CA 90210.
|
(9)
|
All
of these shares represent the number of shares of common stock that Yajun
Wu has the right to acquire upon exercise of an option granted on August
8, 2007.
|
25
Related
Party Transactions
Director
Independence
Our board
of directors has determined that it currently has 4 members who
qualify as “independent” as the term is used in Item 407 of Regulation S-K as
promulgated by the SEC and Nasdaq’s Marketplace Rule 5605(a)(2). The
independent directors are Min Fan, Yunxia Yang, Adam Roseman, and Yajun
Wu. All of the members of our Audit Committee qualify as
independent. All of the members of each of our Nominating and
Compensation Committees qualify as independent, except for Wennan
Li.
The
following tables show the fees that were billed for audit and other services
provided by Frazer
Frost, LLP (the successor entity of Moore Stephens Wurth Frazer and Torbet, LLP)
during the fiscal years indicated:
Fiscal
Year Ended October 31,
|
||||||||
2010
|
2009
|
|||||||
Audit
Fees (1)
|
$
|
175,000
|
$
|
195,000
|
||||
Audit-Related
Fees (2)
|
―
|
|||||||
Tax
Fees (3)
|
12,000
|
12,000
|
||||||
All
Other Fees (4)
|
―
|
|||||||
Total
|
$
|
187,000
|
$
|
207,000
|
|
(1)
|
Audit
Fees – This
category includes the audit of our annual financial statements, review of
financial statements included in our Quarterly Reports on Form 10-Q, and
services that are normally provided by independent auditors in connection
with the engagement for fiscal years. This category also
includes advice on audit and accounting matters that arose during, or as a
result of, the audit or the review of interim financial
statements.
|
|
(2)
|
Audit-Related
Fees – This
category consists of assurance and related services by our independent
auditors that are reasonably related to the performance of the audit or
review of our financial statements and are not reported above under "Audit
Fees." The services for the fees disclosed under this category
include consultation regarding our correspondence with the
SEC.
|
|
(3)
|
Tax
Fees – This
category consists of professional services rendered by our independent
auditors for tax compliance and tax advice. The services for
the fees disclosed under this category include tax return preparation and
technical tax advice.
|
Pre-Approval
Policies and Procedures of the Audit Committee
Our
Audit Committee approves the engagement of our independent auditors and is also
required to pre-approve all audit and non-audit expenses. In the
fiscal year ended October 31, 2010, 100%, 100%, and 100% of our Audit-Related
Fees, Tax Fees, and All Other Fees, respectively, were pre-approved by the Audit
Committee.
PART
IV
Financial
Statements; Schedules
Our
consolidated financial statements for the fiscal years ended October 31, 2010
and 2009 begin on page F-1 of this annual report. We are not required
to file any financial statement schedules.
26
Exhibit
Table
Exhibit
No.
|
Description
|
|
3.1
|
Articles
of Incorporation (7)
|
|
3.2
|
Bylaws (1)
|
|
10.1
|
Premises
Lease Agreement (English translation) (2)
|
|
10.2
|
Letter
of Agreement from the Company to Adam Roseman, dated December 20, 2007
(3)
|
|
10.3
|
Amended
and Restated Employment Agreement between Xiaolin Zhuang and Perfectenergy
International Limited, dated December 29, 2008 (4)
|
|
10.4
|
Lease
Agreement between Shanghai Changlong Industry Co. and Perfectenergy
Solar-Tech (Shanghai) Ltd., dated March 11, 2008 (English
translation) (4)
|
|
10.5
|
Leasing
Contract between Tannenweg 10 Vermögensverwaltung GbR and Perfectenergy
GmbH, dated October 3, 2007 (English translation) (4)
|
|
10.6
|
Addendum
of the Tenancy Contract between Tannenweg 10 Vermögensverwaltung GbR and
Perfectenergy GmbH, dated January 25, 2008 (English translation)
(4)
|
|
10.7
|
Employment
Agreement between the Company and Wennan Li, dated January 16, 2009 and
effective September 2, 2008 (4)
|
|
10.8
|
Employment
Agreement between the Company and Diping Zhou, dated January 16, 2009 and
effective September 2, 2008 (4)
|
|
10.9
|
Long
Term Supply Contract between Perfectenergy (Shanghai) Co., Ltd. and
Chengdu Jiayang Silicon Materials Technology Co., Ltd., dated January 8,
2010 (English translation) (5)
|
|
10.10
|
Salary
Adjustment Letter for Wennan (Jack) Li, dated April 7, 2010
(6)
|
|
10.11
|
Salary
Adjustment Letter for Xiaolin (Edward) Zhuang, dated April 7, 2010
(6)
|
|
10.12
|
Salary
Adjustment Letter for Diping Zhou, dated April 7, 2010
(6)
|
|
14.1
|
Code
of Business Conduct and Ethics (4)
|
|
21.1
|
List
of Subsidiaries (4)
|
|
31.1
|
Section
302 Certificate of Chief Executive Officer *
|
|
31.2
|
Section
302 Certificate of Chief Financial Officer *
|
|
32.1
|
Section
906 Certificate of Chief Executive Officer *
|
|
32.2
|
Section
906 Certificate of Chief Financial Officer
*
|
* Filed
herewith.
(1)
|
Filed
on December 8, 2005 as an exhibit to the Company’s Registration Statement
on Form SB-2 and incorporated herein by reference.
|
(2)
|
Filed
on November 23, 2007 as an exhibit to the Company’s Amendment No. 1 to
Registration Statement on Form SB-2 and incorporated herein by
reference.
|
(3)
|
Filed
on January 22, 2008 as an exhibit to the Company’s Amendment No. 2 to
Registration Statement on Form SB-2 and incorporated herein by
reference.
|
(4)
|
Filed
on January 26, 2009 as an exhibit to our Annual Report on Form 10-K and
incorporated herein by reference.
|
Filed
on January 29, 2010 as an exhibit to our Annual Report on Form 10-K and
incorporated herein by reference.
|
|
(6)
|
Filed
on April 13, 2010 as an exhibit to our Current Report on Form 8-K and
incorporated herein by reference.
|
(7) |
Filed
on June 14, 2010 as an exhibit to our Quarterly Report on Form 10-Q
and incorporated herein by
reference.
|
27
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PERFECTENERGY
INTERNATIONAL LIMITED
|
|
|
|
Date:
January 31, 2011
|
/s/
Wennan Li
|
Wennan
Li, Chief Executive Officer and
President
|
In
accordance with the Securities Exchange of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
NAME
|
TITLE
|
DATE
|
||
/s/ Wennan Li
|
Chairman
of the Board, Chief Executive Officer
(Principal Executive Officer), and President |
January
31, 2011
|
||
Wennan
Li
|
||||
/s/ Xiaolin Zhuang
|
Chief
Financial Officer (Principal Financial and
Accounting Officer) and Secretary |
January
31, 2011
|
||
Xiaolin
Zhuang
|
||||
/s/ Min Fan
|
Director
|
January
31, 2011
|
||
Min
Fan
|
||||
/s/ Yunxia Yang
|
Director
|
January
31, 2011
|
||
Yunxia
Yang
|
||||
/s/ Adam Roseman
|
Director
|
January
31, 2011
|
||
Adam
Roseman
|
||||
/s/ Yajun Wu
|
Director
|
January
31, 2011
|
||
Yajun
Wu
|
28