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EX-32.1 - PERFECTENERGY INTERNATIONAL LTDv215025_ex32-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 þ
Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended: January 31, 2011

or
   
o
Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from ______________ to _______________

Commission File Number: 000-51704
  
PERFECTENERGY INTERNATIONAL LIMITED
(Exact name of registrant as specified in its charter)
 
Nevada
 
98-0548438
(State or other jurisdiction of
incorporation of origination)
 
(I.R.S. Employer
Identification Number)
     
No. 479 You Dong Road,
Xinzhuang Town, Shanghai 201100
People’s Republic of China
 
N/A
(Address of principal executive offices)
 
(Zip code)
 
 
(8621) 5488-8436
 
 
(Registrant’s telephone number, including area code)
 
 
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 requirements for the past 90 days. Yes  x No  o

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

Large Accelerated filer   o
Non-Accelerated Filer  o
Accelerated Filer   o
Smaller Reporting Company x   
 
The registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes  o No x
 
Indicate the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date:  29,626,916 issued and outstanding as of March 16, 2011.

 
 

 
 
TABLE OF CONTENTS
TO QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JANUARY 31, 2011
 
     
Page
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
 
1
       
PART I 
FINANCIAL INFORMATION
  2
       
Item 1.
Financial Statements
  2
       
 
Consolidated Balance Sheets as of January 31, 2011 (unaudited) and October 31, 2010
  2
       
 
Consolidated Statements of Operations and Other Comprehensive Loss for the Three Months Ended January 31, 2011 and 2010 (unaudited)
  3
       
 
Consolidated Statements of Cash Flows for the Three Months Ended January 31, 2011 and 2010 (unaudited)
  4
       
 
Notes to Consolidated Financial Statements (unaudited)
  5
       
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
  21
       
Item 4.
Controls and Procedures
  27
       
PART II
OTHER INFORMATION
  28
       
Item 5.
Exhibits
  28
     
SIGNATURES
  29

 
 

 
 
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION

All statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) for the Company, other than statements of historical facts, that address future activities, events, or developments are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect,” and words of similar import.  These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions, and expected future developments as well as other factors we believe are appropriate under the circumstances.  Whether actual results will conform to the expectations and predictions of management, however, is subject to a number of risks and uncertainties that may cause actual results to differ materially.

Such risks include, among others, the following: international, national, and local general economic and market conditions; our ability to sustain, manage, or forecast our growth; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations.  As used in this Form 10-Q, unless the context requires otherwise, “we” or “us” or “Registrant” or the “Company” means Perfectenergy International Limited, a Nevada corporation, and its subsidiaries. 

 
1

 
 
PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
January 31,
   
October 31,
 
   
2011
   
2010
 
   
(UNAUDITED)
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash
  $ 1,033,103     $ 2,392,053  
Accounts receivable
    3,817,111       3,992,826  
Other receivables
    555,252       457,943  
Inventories, net
    6,796,689       8,161,566  
Prepayments
    1,389,412       1,246,154  
Total current assets
    13,591,567       16,250,542  
                 
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net
    5,682,195       6,032,389  
                 
OTHER ASSETS:
               
Other receivables - long term, net of allowance for doubtful accounts
               
of $ 3,803,387 and $3,803,387 as of January 31, 2011 and October 31, 2010
    -       -  
Deferred tax assets
    123,403       10,184  
Advances on equipment purchases
    8,886       -  
Total other assets
    132,289       10,184  
                 
Total assets
  $ 19,406,051     $ 22,293,115  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 5,718,690     $ 7,661,988  
Accrued liabilities
    1,060,777       1,012,588  
Customer deposits
    472,985       354,923  
Other payables
    140,250       73,641  
Taxes payable
    2,328,746       3,195,366  
Total current liabilities
    9,721,448       12,298,506  
                 
FAIR VALUE OF DERIVATIVE INSTRUMENTS
    -       -  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
Common stock, $.001 par value, 94,250,000 shares authorized,
               
29,626,916 shares issued and outstanding as of
               
January 31, 2011 and October 31, 2010
    29,627       29,627  
Additional paid-in capital
    9,439,569       9,408,487  
Statutory reserves
    110,068       110,068  
Retained deficits
    (1,676,500 )     (1,091,021 )
Accumulated other comprehensive income
    1,781,839       1,537,448  
Total shareholders' equity
    9,684,603       9,994,609  
                 
Total liabilities and shareholders' equity
  $ 19,406,051     $ 22,293,115  
 
 
2

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
(UNAUDITED)

   
Three months ended
 
   
January 31, 2011
   
January 31, 2010
 
REVENUES
  $ 8,271,033     $ 17,327,248  
                 
COST OF REVENUES
    7,512,879       15,613,808  
                 
GROSS PROFIT
    758,154       1,713,440  
                 
OPERATING EXPENSES:
               
Selling, general and administrative
    1,363,250       1,849,668  
Research and development
    95,599       172,830  
Total operating expenses
    1,458,849       2,022,498  
                 
LOSS FROM OPERATIONS
    (700,695 )     (309,058 )
                 
OTHER INCOME (EXPENSE):
               
Interest expense and other bank charges
    (8,274 )     (190 )
Non-operating income
    10,996       102,291  
Change in fair value of derivative instruments
    -       26,861  
Total other income
    2,722       128,962  
                 
LOSS BEFORE PROVISION FOR INCOME TAXES
    (697,973 )     (180,096 )
                 
PROVISION (BENEFIT) FOR INCOME TAXES
    (112,494 )     63,791  
                 
NET LOSS
    (585,479 )     (243,887 )
                 
OTHER COMPREHENSIVE INCOME (LOSS):
               
Foreign currency translation adjustments
    244,391       (102,186 )
                 
COMPREHENSIVE LOSS
  $ (341,088 )   $ (346,073 )
                 
EARNINGS PER SHARE:
               
Basic
  $ (0.02 )   $ (0.01 )
Diluted
  $ (0.02 )   $ (0.01 )
                 
WEIGHTED AVERAGE NUMBER OF SHARES:
               
Basic
    29,626,916       29,626,916  
Diluted
    29,626,916       29,626,916  
 
 
3

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Three months ended
 
   
January 31, 2011
   
January 31, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (585,479 )   $ (243,887 )
Adjustments to reconcile net loss to cash provided by
               
(used in) operating activities:
               
Depreciation
    478,541       212,132  
Bad debt expense
    -       267,115  
Write off on inventory
    15,905       -  
Stock-based compensation expense
    31,082       410,312  
Change in fair value of derivative instruments
    -       (26,861 )
Changes in assets and liabilities:
               
Accounts receivable
    144,325       (812,816 )
Other receivables
    (90,848 )     2,119,513  
Inventories
    1,719,585       3,453,943  
Prepayments
    (126,270 )     346,029  
Deferred tax assets
    (112,494 )     63,790  
Accounts payable
    (1,999,891 )     (3,252,905 )
Accrued liabilities
    62,154       (119,198 )
Customer deposits
    111,736       (1,703,147 )
Other payables
    47,228       (663,651 )
Value-added and other taxes payable
    (847,716 )     190,382  
Net cash (used in) provided by operating activities
    (1,152,142 )     240,751  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of equipment and leasehold improvements
    (61,083 )     (431,680 )
Advances on equipment purchases
    -       383,558  
Net cash used in investing activities
    (61,083 )     (48,122 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    (145,725 )     140,136  
                 
(DECREASE) INCREASE IN CASH
    (1,358,950 )     332,765  
                 
CASH, beginning of period
    2,392,053       3,582,854  
                 
CASH, end of period
  $ 1,033,103     $ 3,915,619  
                 
Supplemental disclosures:
               
Interest paid
  $ -     $ -  
Income taxes paid
  -     $ 28,355  
 
 
4

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 
 
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.
 
 
5

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

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 January 31, 2011
   
Fair Value at January 31, 2011
   
    (Unaudited)    
Level 1
   
Level 2
   
Level 3
Warrant liability (See Note 10)
  $     $     $     $  
 

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 January 31, 2011 were translated at 6.58 RMB to $1.00 as compared to 6.67 RMB to $1.00 at October 31, 2010.  The assets and liabilities of the Company’s German subsidiary at January 31, 2011 were translated at €0.73 to $1.00 as compared to €0.72 to $1.00 at October 31, 2010.  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 three months ended January 31, 2011 and 2010 were 6.62 RMB and 6.82 RMB, respectively. The average translation rates applied to statement of operations accounts of the Company’s German subsidiary for the three months ended January 31, 2011 and 2010 were €0.74 and €0.69 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.
 
 
6

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

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.

(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. Refer to Note 4.  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 $3,803,337.  At each of January 31, 2011 and October 31, 2010, allowance for doubtful accounts amounted to $3,803,337.

(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.  At January 31, 2011 and October 31, 2010, the Company had $585,295 and $561,796, respectively, in inventory reserve.  The Company believes that the reserve is adequate to provide for expected losses.
 
 
7

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

(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.

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 January 31, 2011, 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.
 
 
8

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

(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

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.

(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 expense of sales amounted to $221,320 and $182,288 for the three months ended January 31, 2011 and 2010, respectively.
 
 
9

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 
 
(r) Advertising

Advertising and promotion expenses are expensed as incurred, and the expense was immaterial for the three months ended January 31, 2011 and 2010.

(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.

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

   
Three Months Ended
January 31,
 
   
2011
   
2010
 
    (unaudited)     (unaudited)  
Net loss for basic earnings per share
 
$
(585,479
)
 
$
(243,887
)
                 
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
 
$
(0.02
)
 
$
(0.01
)
Diluted
 
$
(0.02
)
 
$
(0.01
)
 
For the three months ended January 31, 2011 and 2010, none of the issued and outstanding warrants and options were included in the calculation of diluted earnings per share since their effect would be anti-dilutive.

(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.
 
 
10

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

Note 2 – Recently Issued Accounting Standards
 
In April 2010, the FASB issued Accounting Starndards Update (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.

In December 2010, the FASB issued ASU 2010-28 which amends “Intangibles- Goodwill and Other” (Topic 350). The ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting entities, they are required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances changes that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 is effective for fiscal years, and interim periods within those years beginning after December 15, 2010. The adoption of this ASU did not have a material impact on its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29 which address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations (Topic 805). This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro-forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  The adoption of this ASU did not have a material impact on its consolidated financial statements, but expects the adoption of this ASU will have an impact on its future business combinations.

Note 3 – Accounts Receivable

Accounts receivable consisted of the following:
   
January 31, 2011
   
October 31, 2010
 
     
(unaudited)
         
Accounts receivable  
 
$
3,817,111
   
$
3,992,826
 
Less: allowance for doubtful accounts  
   
     
 
Total  
 
$
3,817,111
   
$
3,992,826
 

At January 31, 2011 and October 31, 2010, there was no allowance for doubtful accounts as management believes all accounts balances were considered to be uncollectible.
 
 
11

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 
 
Note 4 – Other Receivables

Other receivables consisted of the following:
 
        
 
January 31, 2011
   
October 31, 2010
 
     
(unaudited)
         
Other receivables - Current  
 
$
555,252
   
$
457,943
 
Other receivables - Noncurrent
   
3,803,387
     
3,803,387
 
Less: allowance for doubtful accounts  
   
(3,803,387
   
(3,803,387
Total  
 
$
555,252
   
$
457,943
 

In June and July 2008, Perfectenergy Shanghai entered into three purchase contracts for purchasing original MEMC granular polysilicon from Sun Materials GmbH (“Sun Materials”).  In accordance with the terms of the purchase contracts, Perfectenergy Shanghai paid 100% of the advance payments to Sun Materials totaling approximately $3.8 million. However, as of January 31, 2011, Sun Materials was unable to either deliver the goods or return most of the advancement. Followed by an abstract debt acknowledgement and repayment agreement between Sun Materials and Regus Management Corp., British Virgin Island (“Regus BVI”), its original supplier for the MEMC granular polysilicon, Regus BVI was obligated to repay the prepayments in five installments.  Regus BVI made a small initial repayment, which was not in accordance with the terms established in the repayment agreement.  There have been no payments from any parties involved.  Based on 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:
       
 
January 31, 2011
   
October 31, 2010
 
     
(unaudited)
         
Raw materials  
  $ 923,048     $ 703,452  
Finished goods  
    6,170,968       7,726,441  
Work in progress  
    271,393       277,760  
Supplies
    16,575       15,709  
Less: inventory reserve
    (585,295 )     (561,796 )
Total  
  $ 6,796,689     $ 8,161,566  
 
A rollforward of the inventory reserve is as follows:
   
Three Months
Ended
January 31,2011
   
Year Ended
October 31, 2010
 
     
(unaudited)
         
Beginning balance
 
$
561,796
   
$
637,335
 
Additions charged to cost of revenues
   
15,905
     
84,389
 
Recovery on obsolete inventory
   
-
     
(172,274
)
Foreign currency translation adjustments
   
7,594
     
12,346
 
Ending balance
 
$
585,295
   
$
561,796
 
 
 
12

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 
 
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 $1,323,307 and $1,197,636 as of January 31, 2011 and October 31, 2010, respectively.

Note 7 – Equipment and Leasehold Improvements

Equipment and leasehold improvements consisted of the following:

   
January 31, 2011
   
October 31, 2010
 
     
(unaudited)
         
Leasehold improvements
  $ 2,022,593     $ 1,959,528  
Transportation equipment
    325,196       321,774  
Machinery
    7,419,569       7,321,695  
Office equipment
    235,594       219,731  
Total
    10,002,952       9,822,728  
Less: accumulated depreciation
    (4,320,757 )     (3,790,339
Total
  $ 5,682,195     $ 6,032,389  

Depreciation expense for the three months ended January 31, 2011 and 2010 amounted to $478,541 and $212,132, respectively.

Note 8 – Late Registration Penalties

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

In lieu of making cash payments, the Company offered to issue restricted common stock at a valuation of $4.00 per share for the first 30 days that the registration statement was late in being declared effective by the SEC, to which certain of the Investors agreed.  Thus, the Company owed the Investors taking cash payments a total of $912,347 as late registration payments.  As of January 31, 2011, the Company paid $390,744 to the Investors and issued aggregate 41,780 shares of common stock valued at $167,120 to seven of the Investors in lieu of a cash payment.  The settlement of the remaining $521,603 is still in progress and is recorded in accrued liabilities, and the expected final payment date is pending by the Company’s Board of Directors.

Note 9 – Retirement Benefit Plans

Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all permanent employees.  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 three months ended January 31, 2011 and 2010, the Company made pension contributions in the amount of $103,921 and $62,763, respectively.
 
 
13

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

Note 10 – Derivative Instruments

In accordance 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).  At January 31, 2011 and October 31, 2010, the fair value of the derivative instrument totaled at $0.

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 January 31, 2011, the Company had warrants as follows:
 
   
Warrants
Outstanding
   
Warrants
Exercisable
   
Weighted
Average Exercise
Price
   
Average Remaining Contractual
Life
 
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
    3,975,714       3,975,714     $ 3.68        
Granted
                       
Forfeited
                       
Exercised
                       
Balance, January 31, 2011 (unaudited)
              $        
 
 
14

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 
 
Note 11 – 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:

   
April 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, 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     $  
Granted
                 
Forfeited
                 
Exercised
                 
Balance, January 31, 2011 (unaudited)
    1,369,387     $ 2.54     $  

As of January 31, 2011, approximately $28,065 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 1.25 years.  As of January 31, 2011, 1,127,720 of the outstanding options are exercisable. Compensation expenses for the three months ended January 31, 2011 and 2010 were $31,082 and $410,312, respectively.
 
 
15

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 
 
Stock-based award as of January 31, 2011 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
   
6.53
   
1,044,387
 
$
2.80
   
6.53
 
125,000
 
$
4.08
   
2.00
   
83,333
 
$
4.08
   
2.00
 
200,000
 
$
0.20
   
9.03
   
   
   
9.03
 


Note 12 – 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 three months ended January 31, 2011 and 2010, 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 three months ended January 31, 2011 and 2010.

Note 13 – Income Taxes
 
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.
 
 
16

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

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

b.
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 three months ended January 31, 2011 and 2010:
 
   
Three Months Ended
January 31,
 
   
2011
   
2010
 
     
(unaudited)
     
(unaudited)
 
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 )     (10.0 )
Germany income taxes
    31.5       31.5  
Germany income tax exemption
    (0.0 )     (0.0 )
Other Item (a)
    (30.4 )     (81.9 )
Effective income tax rates
    16.1 %     (35.4 )%
                 
(a)  
These rates differ from the stated effective tax rate in China mainly due to losses incurred by the non-Chinese entities that are not subject to PRC income taxes or other expenses that are not deductible in the PRC.

Since Perfectenergy Shanghai had an operating loss for the three months ended January 31, 2011 and 2010, the loss can be carried forward to offset income for the next five years.  The Company recorded non-current deferred tax assets of $79,307 and $0 as of January 31, 2011 and October 31, 2010, respectively.  Based on the foregoing information, 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.
 
 
17

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

The estimated tax savings due to the reduced tax rate for the three months ended January 31, 2011 and 2010 amounted to $0 and $25,000, 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 $44,366 and $10,184 as of January 31, 2011 and October 31, 2010, 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 2031.  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 January 31, 2011 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 January 31, 2011.  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 Payable

Taxes payable consisted of the following:
 
   
January 31, 2011
   
October 31, 2010
 
     
(unaudited)
         
Value added taxes payable
  $ 2,085,846     $ 2,978,218  
Income tax payable
    203,768       201,087  
Other tax payable
    39,132       16,061  
Total
  $ 2,328,746     $ 3,195,366  
 
 
18

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

Note 14 – 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 $252,806 and $1,170,245 at January 31, 2011 and October 31, 2010, respectively.  The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

Major Customers

For the three months ended January 31, 2011 and 2010, five customers accounted for approximately 89% and 77%, respectively, of the Company’s sales. These customers accounted for approximately 52% and 47% of the Company’s accounts receivable as of January 31, 2011 and October 31, 2010, respectively.

Major Vendors

For the three months ended January 31, 2011 and 2010, the Company purchased approximately 71% and 58%, respectively, of their raw materials from three major suppliers. These suppliers represented 22% and 64% of the Company’s total accounts payable as of January 31, 2011 and October 31, 2010, 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:
 
 
19

 
 
PERFECTENERGY INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
(UNAUDITED)
 

Geographic Area
 
Three Months Ended
January 31,
 
   
2011
   
2010
 
     
(unaudited)
     
(unaudited)
 
China
 
$
9,053
   
$
286,569
 
Germany
   
8,261,980
     
17,040,679
 
Total revenues
 
$
8,271,033
   
$
17,327,248
 
 
 Long-lived assets:
 
January 31, 2011
   
October 31, 2010
 
   
(Unaudited)
       
China
  $ 5,616,502     $ 5,973,267  
Germany
    65,693       59,122  
Total long-lived assets
  $ 5,682,195     $ 6,032,389  


Note 15 – 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 2011 based on oral agreement with the landlord.  At January 31, 2011, total future minimum lease payments under an operating lease were as follows: 

Year Ending October 31,
 
Amount
 
2011
 
68,000
 
Thereafter
   
 
 

Total rent expense for the three months ended January 31, 2011 and 2010 amounted to $77,877 and $81,667, respectively.
 
Purchase Commitment
 
On January 21, 2011, Perfectenergy Shanghai entered into a purchase contract with one vendor. The Company is committed to purchase solar modules amounting to RMB 22.4 million or $3.4 million. The Company has made a prepayment of $300,000 as of January 31, 2011.
 
 
20

 
 
Item 2. Management’s Discussion and Analysis or Plan of Operation.

The following discussion and analysis of the financial condition of the Company should be read in conjunction with our financial statements and the notes to those financial statements that are included above.  Our discussion includes forward-looking statements based on 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 Notice Regarding Forward-Looking Information and Results of Operations sections in this Quarterly Report on Form 10-Q.  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 is based on our financial statements that 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.

While our significant accounting policies are described in Note 1 to our financial statements under the section above titled “Financial Statements,” we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:

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.

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.
 
 
21

 

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.
 
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 January 31, 2011
      Fair Value at January 31, 2011  
         
Level 1
   
Level 2
   
Level 3
 
                         
Warrant liability (See Note 10)
  $     $     $     $  

 
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.

 
22

 
 
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.  For additional information with respect to the above, refer to Note 4 of our financial statements beginning on page F-1.  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 $3,803,337.  At each of January 31, 2011 and October 31, 2010, allowance for doubtful accounts amounted to $ 3,803,337.

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.

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
 
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 often times 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 January 31, 2011, the Company expects these assets to be fully recoverable.
 
 
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Revenue Recognition
 
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.

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.

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

   
Three Months Ended
January 31,
 
   
2011
   
2010
 
             
Net loss for basic earnings per share
 
$
(585,479
)
 
$
(243,887
)
                 
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
 
$
(0.02
)
 
$
(0.01
)
Diluted
 
$
(0.02
)
 
$
(0.01
)
 
For the three months ended January 31, 2011 and 2010, none of the issued and outstanding warrants and options were included in the calculation of diluted earnings per share since their effect would be anti-dilutive.

 
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RESULTS OF OPERATIONS

Comparison of Three Months Ended January 31, 2011 and January 31, 2010

The following table sets forth the results of our operations for the periods indicated as a percentage of revenues:
 
 
   
Three Months Ended
January 31, 2011
   
% of Revenues
   
Three Months Ended
January 31, 2010
   
% of Revenues
 
Revenues
  $ 8,271,033       100 %   $ 17,327,248       100.0 %
   
 
   
 
                 
Cost of Revenues
    7,512,879       90.8 %     15,613,808       90.1 %
   
 
   
 
                 
Gross Profit (Loss)
    758,154       9.2 %     1,713,440       9.9 %
   
 
   
 
                 
Selling, General, and Administrative Expenses
    1,363,250       16.5 %     1,849,668       10.7 %
   
 
   
 
                 
Research and Development
    95,599       1.2 %     172,830       1.0 %
   
 
   
 
                 
Loss from Operations
    (700,695 )     (8.5 ) %     (309,058 )     (1.8 )%
   
 
   
 
                 
Other Income (Expense)
    2,722       0.0 %     128,962       0.7 %
   
 
   
 
                 
Income (Loss) Before Provision for Income Taxes
    (697,973 )     (8.4 ) %     (180,096 )     (1.0 )%
   
 
   
 
                 
Provision for Income Taxes
    (112,494 )     (1.4 ) %     63,791       0.4 %
   
 
   
 
                 
Net Income (Loss)
    (585,479 )     (7.1 ) %     (243,887 )     (1.4 )%
   
 
   
 
                 
Foreign Currency Translation Adjustment
    244,391       3.0 %     (102,186 )     (0.6 )%
   
 
   
 
                 
Comprehensive Income (Loss)
    (341,088 )     (4.1 ) %     (346,073 )     (2.0 )%
 

Revenues.   Our revenues include revenues from sales of solar cells and solar modules.  During the three months ended January 31, 2011, we had revenues of approximately $8.3 million compared to revenues of approximately $17.3 million for the three months ended January 31, 2010, a decrease of 52%.  This decrease is attributable to a slow down in demand for module products in the European market due to weather conditions as well as decreases in selling prices during the period. Selling prices dropped due to price cuts by competitors and lower demand during the season.

Cost of Revenues.   Cost of revenues for the three months ended January 31, 2011 decreased to approximately $7.5 million from approximately $15.6 million for the three months ended January 31, 2010, a decrease of 52%.  This decrease was in line with revenues for the period. Silicon wafer/cell costs have remained relatively stable compared to the same quarter last year.   In response to lower product sales in the current quarter, we made adjustments to our production and shipment patterns in order to reduce cost and maintain profitability.
 
 
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Gross Profit (Loss).   Gross profit was approximately $0.8 million for the three months ended January 31, 2011 as compared to gross profit of approximately $1.7 million for the three months ended January 31, 2010, representing a gross margin of 9.2% in 2011 and 9.9% in 2010.  The decrease in gross profit was primarily due to reduced selling prices as well as the allocation of production overhead across lower overall production quantity during the period.

Selling, General, and Administrative Expenses.   Selling, general, and administrative expenses totaled approximately $1.4 million for the three months ended January 31, 2011 compared to approximately $1.8 million for the three months ended January 31, 2010, a decrease of 26%.  The decrease is primarily attributable to decreased stock-based compensation expenses and that fact that there were no bad debt charges in the current period compared to the same period last year.
 
Research and Development Costs.   Research and development costs, which included development expenses such as salaries, consultant fees, cost of supplies, and materials for samples and costs related to other overhead such as facilities, utilities, and other departmental expenses, totaled $95,599 for the three months ended January 31, 2011 compared to $172,830 for the three months ended January 31, 2010.  R&D activities have included fine-tuning of our production process, experimentation with new raw materials to improve efficiency or meet specific requirements of customers. The 45% decrease between the two periods is attributable to less of these activities conducted during the period.

Other Income (Expense).   We had other income of $2,722 for the three months ended January 31, 2011 compared to other income of $128,962 for the three months ended January 31, 2010.  The source of other income in previous year was the positive impact from the changes in the value of our issued and outstanding warrants.  There was no impact relating to warrants in the first quarter of 2011 fiscal year since the above-mentioned warrants expired in August 2010.

Net Loss.   Our net loss for the three months ended January 31, 2011 was approximately $0.6 million compared to net loss for the three months ended January 31, 2010 was approximately $0.2 million.  The increase in net loss is attributable to a decrease in sales margin as a result of market conditions and a reduced number of shipments compared to the same period last year.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows – Three Months Ended January 31, 2011

Net cash used in operating activities was $1,152,142 million during the three months ended January 31, 2011, while net cash provided by operating activities was $240,751 during the three months ended January 31, 2010.  The increase in net cash outflow from operating activities during the periods was mainly due to settlement with trade creditors and value added taxes.
 
Net cash used in investing activities was $61,083 during the three months ended January 31, 2011, while net cash used in investing activities was $48,122 during the three months ended January 31, 2010.  Uses of cash in investing activities included equipment purchases and costs associated with construction in progress.  The increase in net cash flow from investing activities between the two periods is attributed to some maintenance work arranged during the non-peak production period this year.

There was no cash provided by or used in financing activities during the three months ended January 31, 2011 and 2010.

 
26

 
 
Liquidity and Capital Resources

As of January 31, 2011, we had cash and cash equivalents of $1.0 million as compared to $2.4 million at October 31, 2010. We will require a significant amount of cash to fund expansion of our operations. Despite a reduction in revenues in the current quarter, management projects growth of our business in future periods. Reduced revenue and profitability, which under present facts and circumstances management believes are temporary, have led us to revise our plans for capital spending and expansion to defer certain steps until we achieve greater profitability or obtain access to capital on terms attractive to us. Further changes in our operating plans, an increase in our inventory, increased expenses, or other events, may prompt us to seek additional equity or debt financing. If we are unable to successfully generate enough sales to cover our costs, we only have limited cash resources to bear operating losses; meanwhile, we will need to continue to generate new sales while controlling our costs.

We 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.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms because of the lack of finance and accounting personnel with an appropriate level of knowledge, experience, and training in the application of U.S. GAAP.  We are in the process of implementing the following measures to remediate these material weaknesses: (a) continue to search for capable 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  (b) continue to work with internal and external consultants to improve the process for collecting and reviewing information required for the preparation of financial statements.  We plan on continuing to identify and implement remedial measures.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 
 
 
27

 
 
PART II - OTHER INFORMATION

Item 1. Legal Proceedings
 
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.  We are also not aware of any 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 our company.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.   
 
Item 3. Defaults upon Senior Securities
 
None.  
 
 
Item 5. Exhibits
 
(a)  None.
 
(b)  There were no changes to the procedures by which security holders may recommend nominees to our board of directors.
 
Exhibit
Number
 
Description
3.1
 
Articles of Incorporation (2)
     
3.2
 
Bylaws (1)
     
31.1
 
Section 302 Certification by the Company’s Chief Executive Officer *
     
31.2
 
Section 302 Certification by the Company’s Chief Financial Officer *
     
32.1
 
Section 906 Certification by the Company’s Chief Executive Officer *
     
32.2
 
Section 906 Certification by the Company’s Chief Financial Officer *
 
*
 
Filed herewith.
   
(1)
Filed on December 8, 2005 as an exhibit to our Registration Statement on Form SB-2 and incorporated herein by reference.
   
(2)
Filed on June 14, 2010 as an exhibit to our Quarterly Report on Form 10-Q and incorporated herein by reference.  

 
28

 
 
SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

 
Perfectenergy International Limited
(Registrant)
     
Date: March 17, 2011
By:
/s/ Wennan Li
______________________________
   
Wennan Li
   
Chief Executive Officer
(Principal Executive Officer)
     
Date: March 17, 2011
By:
/s/ Xiaolin Zhuang
   
____________________________________
Xiaolin Zhuang
   
Chief Financial Officer
(Principal Accounting & Financial Officer)
 
 
29