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EX-31.2 - EXHIBIT 31.2 - UNIVERSAL SOLAR TECHNOLOGY, INC.v231288_ex31-2.htm
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EX-32.2 - EXHIBIT 32.2 - UNIVERSAL SOLAR TECHNOLOGY, INC.v231288_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - UNIVERSAL SOLAR TECHNOLOGY, INC.v231288_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - UNIVERSAL SOLAR TECHNOLOGY, INC.v231288_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - UNIVERSAL SOLAR TECHNOLOGY, INC.Financial_Report.xls

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

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number: 333-150768

UNIVERSAL SOLAR TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

Nevada
26-0768064
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

No. 1 Pingbei Road 2, Nanping
Science &Technology Industrial
Park, Zhuhai City, Guangdong
Province
The People’s Republic of
China 519060
(Address of principal executive
offices including zip code)

86-756 8682610
(Registrant’s telephone number, including area code)

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

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. xYes ¨ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No.

The number of shares of Common Stock outstanding as of August 12, 2011 was 22,599,974 shares.
  
 
 
 

 

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
3
     
Item 1.
Financial Statements
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
11
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
18
     
Item 4.
Controls and Procedures
18
     
PART II.
OTHER INFORMATION
19
     
Item 1.
Legal Proceedings
19
     
Item 1A.
Risk Factors
19
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
19
     
Item 3.
Defaults upon Senior Securities
19
     
Item 4.
(Removed and Reserved.)
19
     
Item 5.
Other Information
19
     
Item 6.
Exhibits
19
   
SIGNATURES
20

 
2

 
 
PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements

UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 
 
June 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
             
ASSETS
           
             
CURRENT ASSETS
           
Cash and cash equivalents
  $ 238,725     $ 392,958  
Accounts receivable
    210,567       30,455  
Inventories
    1,330,278       469,079  
Prepaid expenses and other current assets
    1,198,060       955,012  
TOTAL CURRENT ASSETS
    2,977,630       1,847,504  
                 
Deposits for future deliveries of property and equipment
    91,978       75,452  
Land use right, net of accumulated amortization of $27,491 and $22,777, respectively
    419,063       414,541  
Property, plant and equipment, net of accumulated depreciation of $438,746 and $177,584, respectively
    6,289,057       6,278,577  
Construction in process
    775,171       690,182  
                 
TOTAL ASSETS
  $ 10,552,899     $ 9,306,256  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
               
                 
CURRENT LIABILITIES
               
Accounts payable
  $ 508,301     $ 786,038  
Accured expenses and other current liabilities
    236,079       392,828  
Short-term loan
    464,145       2,121,212  
Due to related-parties - current portion
    343,544       31,832  
TOTAL CURRENT LIABILITIES
    1,552,069       3,331,910  
                 
Due to related-parties - non-current portion
    11,063,284       6,818,439  
                 
TOTAL LIABILITIES
    12,615,353       10,150,349  
                 
STOCKHOLDERS' DEFICIENCY
               
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding
    -       -  
Common stock, $0.0001 par value, 22,599,974 shares issued and outstanding
    2,260       2,260  
Additional paid-in capital
    620,812       620,812  
Accumulated deficit
    (2,772,853 )     (1,519,274 )
Accumulated other comprehensive income
    87,327       52,109  
TOTAL STOCKHOLDERS' DEFICIENCY
    (2,062,454 )     (844,093 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY
  $ 10,552,899     $ 9,306,256  

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

 
3

 
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(Unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
SALES
  $ 768,035       -       1,723,046       -  
COST OF SALES
    1,477,235       -       2,393,180       -  
                                 
GROSS LOSS
    (709,200 )     -       (670,134 )     -  
                                 
OPERATING EXPENSES
                               
General and administrative expenses
    201,014       189,327       375,293       350,815  
Selling expenses
    6,111       -       18,224       -  
TOTAL OPERATING EXPENSES
    207,125       189,327       393,517       350,815  
                                 
LOSS FROM OPERATIONS
    (916,325 )     (189,327 )     (1,063,651 )     (350,815 )
                                 
Non-operating income
    21,263       -       21,263       -  
Interest expenses, net of interest income
    (97,592 )     (16,868 )     (209,206 )     (101,981 )
Loss on foreign currency transactions
    (543 )     (1,419 )     (1,985 )     (3,460 )
                                 
NET LOSS
    (993,197 )     (207,614 )     (1,253,579 )     (456,256 )
                                 
OTHER COMPREHENSIVE INCOME
                               
Foreign currency translation adjustment
    30,944       16,878       35,218       32,676  
                                 
COMPREHENSIVE LOSS
  $ (962,253 )     (190,736 )     (1,218,361 )     (423,580 )
                                 
Loss per common share - basic and diluted
  $ (0.04 )   $ (0.01 )     (0.05 )     (0.02 )
                                 
Weighted average number of shares outstanding - basic and diluted
    22,599,974       22,599,974       22,599,974       22,599,974  

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

 
4

 
 
UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended June 30,
 
   
2011
   
2010
 
OPERATING ACTIVITIES:
           
Net loss
  $ (1,253,579 )   $ (456,256 )
  Adjustments to reconcile net loss to net cash used in operating activities:
               
Imputed interest on loans from related parties
    -       44,374  
Increase in long-term interest payable to affiliated parties
    -       57,945  
Depreciation of property and equipment
    254,181       7,936  
Amortization of land use right
    4,185       5,637  
Inventory allowance
    362,856       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (177,429 )     -  
Prepaid expenses and other assets
    (220,347 )     (463,956 )
Inventories
    (1,204,472 )     (254,806 )
Accounts payable
    (290,988 )     -  
Accrued expenses and other current liabilities
    (172,589 )     230,735  
NET CASH USED IN OPERATING ACTIVITIES
    (2,698,182 )     (828,391 )
                 
CASH FLOWS USED IN INVESTING ACTIVITIES:
               
Deposits for future delivery of equipment
    (14,763 )     (281,398 )
Acquisition of property and equipment
    (203,106 )     (619,262 )
Acquisition of intangible assets
    -       (5,842 )
NET CASH USED IN INVESTING ACTIVITIES
    (217,869 )     (906,502 )
                 
CASH FLOWS PROVIDED BY FINANCING ACTIVITES:
               
Repayment of short-term loans
    (1,682,514 )     -  
Proceeds from loans from related parties
    4,434,088       1,524,273  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    2,751,574       1,524,273  
                 
Effect of exchange rate changes on cash
    10,244       6,849  
                 
Decrease in cash
    (154,233 )     (203,771 )
                 
Cash - Beginning of period
    392,958       1,115,047  
                 
Cash - End of period
  $ 238,725     $ 911,276  
                 
Supplemental disclosures of cash flow information:
               
Interest paid
  $ 102,721     $ -  
Income taxes paid
  $ -     $ -  

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

 
5

 

UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
INTERIM FINANCIAL STATEMENTS
 
The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2011 and the results of operations for the three and six months ended June 30, 2011 and 2010 and cash flows for the six months ended June 30, 2011 and 2010. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three months and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year ending December 31, 2011. The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
 
2.
BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
 
Universal Solar Technology, Inc. (the “Company”) was incorporated in the State of Nevada on July 24, 2007. The Company operates through its wholly-owned subsidiaries, Kuong U Science & Technology (Group) Ltd. (“Kuong U”), a company incorporated in Macau, Peoples Republic of China (“PRC”) on May 10, 2007, and Nanyang Universal Solar Technology Co., Ltd. (“NUST”), a company incorporated in Nanyang, PRC on September 8, 2008. The Company manufactures and sells silicon wafers and solar photovoltaic (“PV”) modules.
 
Basis of presentation
 
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant inter-company accounts and transactions have been eliminated. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
 
Currency translation
 
The reporting currency of the Company is the United States dollar (USD). The functional currency of Kuong U is the Hong Kong dollar (HKD). The functional currency of NUST is the Chinese Yuan (RMB). Revenue and expense accounts of our two subsidiaries are translated into United States dollars at the average rates during the period, and balance sheet items are translated at period-end rates, except for equity accounts which are translated at historical rates. Translation adjustments arising from the use of differing exchange rates from period to period are included as a separate component of shareholders’ equity. Gains and losses from foreign currency transactions are recognized in current operations.
 
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

 
6

 

UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Going concern
 
The financial statements have been prepared on a “going concern” basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. At June 30, 2011, the Company had working capital of $1,425,561 and a stockholders’ deficiency of $2,062,454. Further, the Company has accumulated deficit of $2,772,853 since inception. In addition, during three months ended June 30, 2011, the gross profit of the Company’s business was a loss of $709,200. These factors, among others, raise substantial doubt as to the Company’s ability to continue as a going concern. The Company plans to improve its financial condition by raising capital in a private placement of its securities. However, there is no assurance that the Company will be successful in accomplishing this objective. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
 
Uses of estimates in the preparation of financial statements
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates.
 
Impairment of long-lived assets
 
Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, an impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.
 
3.
INVENTORY
 
As of June 30, 2011 and December 31, 2010, inventories, net, consist of:
 
  
 
June 30, 2011
   
December 31, 2010
 
Raw materials
  $ 390,911     $ 248,263  
Finished goods
    1,061,166       226,313  
Work in process
    300,431       5,077  
Other
    45,543       88,086  
Inventories - gross
    1,798,051       567,739  
Allowance on inventories
    (467,773 )     (98,660 )
Inventories - net
  $ 1,330,278     $ 469,079  

 
7

 

UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
4.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
As of June 30, 2011 and December 31, 2010, prepaid expenses and other current assets consist following:

   
June 30, 2011
   
December 31, 2010
 
Input Value Added Tax
  $ 797,264     $ 657,738  
Other prepaid expenses and other current assets
    400,796       297,274  
    $ 1,198,060     $ 955,012  
 
5.
SHORT-TERM LOANS
 
The Company has entered into five short-term loan agreements with Fangcheng County Hong Yu Industrial Development and Investment Company (“Fangcheng Hong Yu”) during the year ended December 31, 2010 and the six months ended June 30, 2011.

The following table sets forth detailed information regarding the four short-term loans with Fangcheng Hong Yu:

 
 
Interest rate
   
   
   
Principal amount
 
Maturity date
 
(per annum)
   
Note
   
June 30, 2011
   
December 31, 2010
 
December 31, 2010
    5.31 %     (1 )   $ -     $ 757,576  
January 13, 2011
    9.60 %     (2 )     -       757,576  
January 20, 2011
    9.60 %     (3 )     -       606,060  
June 20, 2012
    9.60 %     (4 )     464,145       -  
   
Total
              464,145       2,121,212  

(1, 2 and 3) the Company repaid all outstanding principal and accrued interest under these short-term loans during the six months ended June 30, 2011 in the aggregate principal amount of $2,121,212 and interest of $94,155.
 
6.
DUE TO RELATED PARTIES
 
Due to related parties consists of:
 
Related parties
 
Maturity date
 
Interest rate
(per annum)
   
June 30, 2011
   
December 31, 2010
 
Mr. Wensheng Chen, Chief Executive Officer, Chairman of Board
 
December 1, 2013
    3.5 %   $ 3,211,664     $ 3,161,969  
Ms. Ling Chen, President
 
Due on demand
    3.5 %     343,544       106,137  
Zhuhai Yuemao Laser Facility Engineering Co., Ltd. (“Yuemao Laser”)
 
December 1, 2013
    3.5 %     332,941       177,620  
Yuemao Science & Technology Group (“Yuemao Technology”)
 
December 1, 2013
    3.5 %     7,518,679       3,404,545  
Total
                11,406,828       6,850,271  
Due to related parties - current portion
                343,544       31,832  
Due to related parties - non-current portion
              $ 11,063,284     $ 6,818,439  
 
Both Yuemao Laser and Yuemao Technology are private companies organized and operating under the laws of the PRC and controlled by the Company’s Chairman and Chief Executive Officer, Mr. Wensheng Chen.

 
8

 

UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

On May 5, 2011, Mr. Wensheng Chen and the Company entered into an agreement pursuant to which the Company and Mr. Wensheng Chen agreed that all loans from Mr. Wensheng Chen will bear interest at the rate of 3.5% per annum beginning January 1, 2011. Accrued interest is payable at times determined by the Company based upon its cash flows.

On May 5, 2011, Ms. Ling Chen and the Company entered into an agreement pursuant to which the Company and Ms. Ling Chen agreed that all loans from Ms. Ling Chen will bear interest at the rate of 3.5% per annum beginning January 1, 2011. Accrued interest is payable at times determined by the Company based upon its cash flows.

Interest expense on loans from related parties aggregated approximately $81,000 and $17,000 for the three months ended June 30, 2011 and 2010, respectively. Interest expense on loans from related parties aggregated approximately $143,000 and $101,000 for the six months ended June 30, 2011 and 2010, respectively.

Kuong U rents its executive office space from Ms. Ling Chen under a four-year contract, which expired on April 30, 2011. The agreement provided provides for monthly rent in the amount of HKD 12,000 ($1,543 translated at the June 30, 2011 exchange rate). Rent expense for the three months ended June 30, 2011 and 2010 was approximately $1,543 and $5,279, respectively. Rent expense for the six months ended June 30, 2011 and 2010 was approximately $6,166 and $10,558, respectively. The parties have agreed not to renew this contract.
 
7.
MAJOR CUSTOMERS
 
During the three and six months ended June 30, 2011, the Company sold all of its products to customers located in China.  During three months ended June 30, 2011, two customers accounted for approximately 63.0% and 37.0% of sales, respectively. During the comparable period of 2010, the Company did not sell any products to customers. During six months ended June 30, 2011, three customers accounted for approximately 59.3%, 16.4% and 16.2% of sales. The Company did not have any sales during the comparable period of 2010.
 
8.
INCOME TAXES
 
The Company’s Chinese subsidiaries are governed by Income Tax Law of the PRC concerning private-run enterprises, which are generally subject to taxes at a statutory rate of 25% on income reported in the statutory financial statements prepared in accordance with PRC GAAP after appropriate tax adjustments. Applicable income tax rate of Kuong U is 15%. Operating loss carryforwards can be utilized for five years in China and 20 years in the U.S.

As of June 30, 2011, the Company had approximately $2,400,000 and $390,000 of net operating loss carryforwards for income tax purposes in China and the United States, respectively, which will expire between 2014 and 2030.

Based on management’s present assessment, the Company has determined it to be more likely than not that a deferred tax asset attributable to the future utilization of the net operating loss carry-forward as of June 30, 2011 and December 31, 2010 will not be realized. Accordingly, the Company has provided a 100% allowance against the deferred tax asset in the financial statements at June 30, 2011 and December 31, 2010. The Company will continue to review this valuation allowance and make adjustments as appropriate.

 
9

 

UNIVERSAL SOLAR TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
9.
COMMITMENTS AND CONTINGENCIES
 
Vulnerability due to operations in PRC
 
The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, there is no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.
 
The PRC has adopted currency and capital transfer regulations. These regulations require that the Company comply with complex regulations for the movement of capital. Because most of the Company’s future revenues will be in RMB, any inability to obtain the requisite approvals, or any future restrictions on currency exchanges, will limit the Company’s ability to fund its business activities outside China or to pay dividends to its shareholders.
 
The Company’s assets will be predominantly located inside China. Under the laws governing foreign invested enterprises in China, dividend distribution and liquidation are allowed, but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision, as well as the foreign exchange control.
 
In addition, the results of business and prospects are subject, to a significant extent, to the economic, political and legal developments in China.
 
While China’s economy has experienced significant growth in the past twenty years, growth has been irregular, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but may also have a negative effect on the Company. The Company’s sales and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations.
 
Foreign companies conducting operations in the PRC face significant political, economic and legal risks. The Communist regime in the PRC includes a stifling bureaucracy which may hinder Western investment. Any new government regulations or utility policies pertaining to the Company’s PV products may result in significant additional expenses to the Company, Company distributors and end users and, as a result, could cause a significant reduction in demand for the Company’s PV products.
 
10.
SUBSEQUENT EVENTS
 
The Company has evaluated subsequent events through the date of these financial statements were issued and determined that there were no subsequent events to recognize or disclose in these financial statements.

 
10

 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
You should read the following discussion and analysis in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2011.
 
DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, including statements that include the words “believes,” “expects,” “anticipates,” or similar expressions. These forward-looking statements include, among others, statements concerning our expectations regarding our working capital requirements, financing requirements, business, growth prospects, competition and results of operations, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements contained herein.
 
OVERVIEW OF OUR BUSINESS
 
We primarily manufacture, market and sell silicon wafers to manufacturers of solar cells. The Company intends to construct its own solar cell production facility or to acquire an existing solar cell production facility, however, the Company will need to raise substantial additional capital in order to fulfill these plans. In addition, we have the capability to manufacture PV modules with solar cells purchased from third parties, however, we do not expect to begin manufacturing PV modules until we have the ability to manufacture our own solar cells.
 
Product Line 1 - Silicon Wafers
 
We produce silicon wafers by extracting purified mono-crystalline silicon from virgin poly-silicon feedstock utilizing mono-crystalline silicon ingot growers. Then we cut the purified mono-crystalline silicon ingots into silicon wafers with multi-wire saws. Silicon wafers are one of the most important components in solar cells.
 
As of June 30, 2011, we have eleven mono-crystalline silicon ingot growers. Maximum production capacity of each mono-crystalline silicon ingot grower is approximately one ton of mono-crystalline silicon ingots per month. Our current mono-crystalline silicon ingot production capacity is approximately 132 tons per annum.
 
We are also equipped with five multi-wire saws, each of which can produce approximately 70 silicon wafers per kilogram of mono-crystalline silicon ingot. Based on an estimated 2.8 watts (W) per silicon wafer, our current silicon wafer production capacity represents approximately 20MW per annum.
 
During the three months ended June 30, 2011, the capacity utilization rate of our silicon wafer production machines fluctuated between 20% and 45%.

 
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Product Line 2 – PV Modules
 
We have two semi-automatic production lines for the manufacture of PV modules. Our existing production capacity is approximately 20MW of PV modules per annum. During 2010, we produced various types of PV module samples, but we did not produce PV modules in commercial quantities. Currently, in order to produce PV modules, we would need to purchase solar cells from third parties, which is not economical. As a result, during the three and six months ended June 30, 2011, the Company did not produce any PV modules. We do not expect to begin manufacturing PV modules until we have the ability to manufacture our own solar cells.
 
Overview of Properties, Plant and Equipment
 
We have acquired land-use rights to 71,346 square meters in Henan Province, PRC for industrial usage. The land use rights expire on July 23, 2060. We began the construction of our manufacturing facilities on this site in 2008. As of June 30, 2010, we have completed the construction of two workshops, each of which comprises 2,016 square meters. Both of these workshops are in operation and we are in the process of constructing an additional three workshops, which we expect to complete by the end of 2011.
 
As of June 30, 2011, the net book value of our property, plant and equipment was $6,289,057.
 
Critical Accounting Policies
 
During the three and six months ended June 30, 2011, there were no changes made to our critical accounting policies and the use of estimates. For further information, please refer to “Critical Accounting Policies” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.
 
Operation
 
In 2011, the price of silicon wafers dropped due to a decrease in the price of solar cells.
 
RESULTS OF OPERATIONS
 
Comparison of Three Months ended June 30, 2011 and 2010:
 
Revenues.  Our revenue for the three months ended June 30, 2011 was $768,035 compared to $0 revenue in the comparable period in 2010. During fiscal 2011, all revenues were generated from sales of silicon wafers produced in NUST’s newly constructed manufacturing facilities.
 
Cost of Sales.  Our cost of sales was $1,477,235 for the three months ended June 30, 2011 compared to $0 in the comparable period in 2010. During the three months ended June 30, 2011, due to a decrease in the market price of silicon wafers, including our products, we included $365,047 as a provision for obsolete inventory into cost of goods sold. During the comparable period in 2010, the Company had no revenues and therefore no cost of sales.
 
Gross Profit.  Gross profit for the three months ended June 30, 2011 was a loss of $709,200, of which $365,047 was attributable to the provision for obsolete inventory discussed above. In comparison, our gross profit margin was 9.2% for fiscal year ended December 31, 2010. During the three months ended June 30, 2011, the market price of silicon wafers was unexpectedly low due to decrease in the selling price of solar cells, which result in a reduction of gross profit margin. During the three months ended June 30, 2010, no gross profit was generated because the Company did not sell any products to customers during that period.

 
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General and Administrative Expenses.  General and administrative expenses consist primarily of salaries and other personnel-related costs, professional fees, etc. General and administrative expenses increased by $11,687 or 6.2% to $201,014 for the three months ended June 30, 2011 from $189,327 for the comparable period in 2010. The increase in general and administrative expenses was mainly due to increased amounts of consulting and professional fees incurred in connection with being a public company.
 
Selling expenses.  Selling expenses include exhibition and other selling expenses. Selling expenses for the three months ended June 30, 2011 were $6,111. During the comparable period in 2010, the Company did not incur any selling expenses. The increase in selling expenses was mainly due to the expansion of our sales force and the launch of our sales campaign to boost brand awareness and market share.
 
Non-operating income.  Non-operating income includes income generated from sales of scrap, such as worn-out carton box and steel wire. Non-operating income for the three months ended June 30, 2011 was $21,263. No such income was generated during the comparing period of 2010.
 
Interest expenses.  Interest expenses, increased by $80,724 or 478.6% from $16,868 in the three months ended June 30, 2010 to $97,592 for the comparable period in 2011. The increase in interest expenses was mainly due to the following: (1) on May 5, 2011, the Company entered into amendments to loan agreements with Mr. Wensheng Chen, the Company’s Chief Executive Officer and Chairman of Board, Ms. Ling Chen, President of the Company, Yuemao Laser and Yuemao Technology. Pursuant to these amendments, loans borrowed from these related parties bear interest at rate of 3.5% per annum starting from January 1, 2011. See Note 5 of Notes to Consolidated Financial Statements; (2) increased amount of loans borrowed from Mr. Wensheng Chen, the Company’s Chief Executive Officer and Chairman of Board, Ms. Ling Chen, President of the Company, Yuemao Laser and Yuemao Technology; and (3) the Company borrowed a total of $3,043,491 pursuant to short-term loans from Fangcheng Hong Yu during 2010 and the three months ended June 30, 2011. See Note 4 of Notes to Consolidated Financial Statements.
 
Net Loss.  Net loss increased by $785,583 or 378.4% to $993,197 for the three months ended June 30, 2011 from $207,614 for the comparable period in 2010. The increase in net loss is mainly due to the reasons discussed above.
 
Comparison of Six Months ended June 30, 2011 and 2010:
 
Revenues.  Our revenue for the six months ended June 30, 2011was $1,723,046 compared to $0 for the comparable period in 2010. During fiscal 2011, all revenues were generated from sales of silicon wafers produced in NUST’s newly constructed manufacturing facilities.
 
Cost of Sales.  Our cost of sales was $2,393,180 for the six months ended June 30, 2011 compared to $0 for the comparable period in 2010. During three months ended June 30, 2011, due to a decrease in the market price of silicon wafers including our products, we included $365,047 as a provision for obsolete inventory into cost of goods sold.
 
Gross Profit.  Gross profit for the six months ended June 30, 2011 was a loss of $670,134, of which $365,047 was attributable to the provision for obsolete inventory discussed above. In comparison, our gross profit margin was 9.2% for fiscal year ended December 31, 2010. During the six months ended June 30, 2011, the market price of silicon wafers was unexpectedly low due to decrease in the selling price of solar cells, which resulted in a reduction of gross profit. During the six months ended June 30, 2010, no gross profit was generated because the Company did not sell any products to customers during that period.

 
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General and Administrative Expenses.  General and administrative expenses consist primarily of salaries and other personnel-related costs, professional fees, etc. General and administrative expenses increased by $24,478 or 7.0% to $375,293 for the six months ended June 30, 2011 from $350,815 for the comparable period in 2010. The increase in general and administrative expenses was mainly due to increased amounts of consulting and professional fees incurred in connection with being a public company.
 
Selling expenses.  Selling expenses include exhibition and other selling expenses. Selling expenses for the six months ended June 30, 2011 were $18,224. During the comparable period in 2010, the Company did not incur any selling expenses. The increase in selling expenses was mainly due to the expansion of our sales force and the launch of our sales campaign to boost brand awareness and market share.
 
Non-operating income.  Non-operating income includes income generated from sales of scrap, such as worn-out carton box and steel wire. Non-operating income for the six months ended June 30, 2011 was $21,263. No such income was generated during the comparing period of 2010.
 
Interest expenses.  Interest expenses increased by $107,225 or 105.1% from $101,981 in the six months ended June 30, 2010 to $209,206 for the comparable period in 2011. The increase in interest expenses was mainly due to the following:
 
(1) On May 5, 2011, the Company entered into amendments to loan agreements with Mr. Wensheng Chen, the Company’s Chief Executive Officer and Chairman of Board, Ms. Ling Chen, President of the Company, Yuemao Laser and Yuemao Technology. Pursuant to these amendments, loans borrowed from these related parties bear interest at rate of 3.5% per annum starting from January 1, 2011. See Note 5 of Notes to Consolidated Financial Statements; (2) increased amount of loans borrowed from Mr. Wensheng Chen, the Company’s Chief Executive Officer and Chairman of Board, Ms. Ling Chen, President of the Company, Yuemao Laser and Yuemao Technology; and (3) the Company borrowed a total of $3,043,491 pursuant to five short-term loans from Fangcheng Hong Yu during 2010 and the three months ended June 30, 2011. Four of these loans were repaid in full during the three months ended June 30, 2001. See Note 4 of Notes to Consolidated Financial Statements.
 
Net Loss.  Net loss increased by $797,323 or 174.8% to $1,253,579 for the six months ended June 30, 2011 from $456,256 for the comparable period in 2010. The increase in net loss is mainly due to the reasons discussed above.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of June 30, 2011, we had total assets of $10,552,899 and total liabilities of $12,615,353, representing working capital of $1,425,561. Cash and cash equivalents were $392,958 at the beginning of the six months ended June 30, 2011 and decreased to $238,725 at the end of the quarter ended June 30, 2011.
 
During the six months ended June 30, 2011, cash used in operations was $2,698,182, an increase of 225.7% from $828,391 for the same period of 2010. The increase was mainly due to the following reasons:
 
(1) an increase in prepaid expenses and other current assets. The balance of prepaid expenses and other current assets increased by $243,048 or 25.4% to $1,198,060 as of June 30, 2011 compared with $955,012 as of December 31, 2010;
 
(2) an increase in inventories. The balance of inventories increased by $861,199 or 183.6% to $1,330,278 as of June 30, 2011 compared with $469,079 as of December 31, 2010. The increase of inventory is mainly due to increased amount of finished products and work in process. Management believes that the selling price of our products will go up in the rest of 2011; and

 
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(3) a decrease in accounts payable. As of June 30, 2011 accounts payable decreased by 35.3% to $508,301 compared to $786,038 at December 31, 2010.
 
(4) a decrease in accrued expenses and other current liabilities. As of June 30, 2011, accrued expenses and other liabilities decreased $156,749 or 39.9% to $236,079 as compared to $392,828 at December 31, 2010.
 
Net cash used in investing activities for the six months ended June 30, 2011 decreased by $688,633 to $217,869 from $906,502 in the comparable period in 2010. The significant decrease in net cash used in investing activities was mainly due to the following: (1) during the six months ended June 30, 2010, the Company was in the process of constructing two workshops and making arrangements to purchase silicon wafer production machinery and PV modules product lines, which used significant amounts of cash. In comparison, during the six months ended June 30, 2011, the construction of two workshops were completed and machinery for manufacturing silicon wafers and PV modules were placed into operation; (2) during the six months ended June 30, 2011, the Company’s reduced cash flow prevented it from investing in new workshops or new equipment.
 
Net cash provided by financing activities in the six months ended June 30, 2011 was $2,751,574, an 80.5% increase from $1,524,273 for the same period in 2010. This increase was mainly due to an increase in advances received from related parties. During the six months ended June 30, 2011, the Company received $4,434,088 from related parties; comparably, the Company received $1,524,273 from loans from various related parties during the same period of 2010. However, the Company repaid $1,682,514 from a local financial institution during the six months ended June 30, 2011.
 
As of June 30, 2011, the Company had working capital of $1,425,561 and a stockholders’ deficiency of $2,062,454. The Company had an accumulated deficit of $2,772,853 since inception. In addition, during three months ended June 30, 2011, the gross profit of the Company’s business was a loss of $709,200.The Company’s difficult financial position, continuous losses and low share price and inactive stock trading volume have made it difficult for the Company to raise additional capital.
 
Related party loans
 
The following table presents amounts of related party loans:
 
Related parties
 
Maturity date
 
Interest rate (per
annum)
   
June 30, 2011
 
December 31,
2010
 
Mr. Wensheng Chen, CEO, Chairman of Board
 
December 1, 2013
    3.5 %   $ 3,211,664     $ 3,161,969  
Ms. Ling Chen, President
 
Due on demand
    3.5 %     343,544       106,137  
Zhuhai Yuemao Laser Facility Engineering Co., Ltd. (“Yuemao Laser”)
 
December 1, 2013
    3.5 %     332,941       177,620  
Yuemao Science & Technology Group (“Yuemao Technology”)
 
December 1, 2013
    3.5 %     7,518,679       3,404,545  
Total
 
 
            11,406,828       6,850,271  
Due to related parties - current portion
 
 
            343,544       31,832  
Due to related parties - non-current portion
 
 
          $ 11,063,284     $ 6,818,439  
 
 
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Both Yuemao Laser and Yuemao Technology are PRC companies and controlled by the Company’s chairman and Chief Executive Officer, Mr. Wensheng Chen.
 
Mr. Wensheng Chen, Chairman and Chief Executive Officer of the Company
 
Non-Trade Transactions

At December 31, 2010, the Company owed Mr. Wensheng Chen $3,161,969 for advances made to the Company in 2010. During the six months ended June 30, 2011, Mr. Chen paid various expenses on behalf of the Company. As of June 30, 2011, amounts due Mr. Chen were $3,211,664. On May 5, 2011, Mr. Chen and the Company entered into an amendment to the loan agreement pursuant to which the parties agreed that all amounts borrowed from Mr. Chen will bear interest at the interest rate of 3.5% per annum starting from January 1, 2011. The parties also agreed that the Company could repay accrued interest when its cash flow circumstance allows. Loans borrowed from Mr. Wensheng Chen are payable on demand. During the six months ended June 30, 2011, the Company accrued interest of $55,307 on loans from Mr. Chen.
 
Ms. Ling Chen, President of the Company
 
Non-Trade Transactions

As of December 31, 2010, the Company owned Ms. Chen $106,137 for advances made to the Company in 2010. During the six months ended June 30, 2011, Ms. Ling Chen paid various expenses on behalf of the Company. As of June 30, 2011, amounts due Ms. Chen were $343,544. On May 5, 2011, Ms. Ling Chen and the Company entered into an amendment to the loan agreement pursuant to which the parties agreed that all amounts borrowed by the Company from Ms. Ling Chen will bear interest at the interest rate of 3.5% per annum starting from January 1, 2011. The parties also agreed that the Company can repay accrued interest when its cash flow circumstance allows. Loans borrowed from Ms. Ling Chen are payable on demand. During the six months ended June 30, 2011, the Company accrued interest of $4,863 on loans from Ms. Ling Chen.

Trade Transaction

Kuong U rents its executive office space from Ms. Ling Chen under a four-year contract, which expired on April 30, 2011. The rental agreement provides for monthly rent in the amount of HKD 12,000 ($1,543 translated at the June 30, 2011 exchange rate). Rent expense for the three months ended June 30, 2011 was approximately $1,543.
 
Yuemao Science & Technology Group (“Yuemao Technology”)
 
Yuemao Technology is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr. Wensheng Chen.

 
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Non-Trade Transaction

As of December 31, 2010, amounts due Yuemao Technology were $3,404,545. During the six months ended June 30, 2011, Yuemao Technology paid various expenses on behalf of the Company. As of June 30, 2011, amounts due to Yuemao Technology were $7,518,679. On May 5, 2011, Yuemao Technology and the Company entered into an amendment to loans. The amendment sets forth that all loans the Company borrowed from Yuemao Technology will bear interest at the interest rate of 3.5% per annum starting from January 1, 2011. The Company can make repayment of accrued interest when its cash flow circumstance allows. During the three months ended June 30, 2011, the Company accrued interest of $77,191 on loans from Yuemao Technology.
 
Zhuhai Yuemao Laser Facility Engineering Co., Ltd.  (“Yuemao Laser”)
 
Yuemao Laser is a private company established under the laws of the PRC and controlled by our Chairman and Chief Executive Officer, Mr. Wensheng Chen.

Non-Trade Transactions

As of December 31, 2010, amounts due Yuemao Laser were $177,620. During the six months ended June 30, 2011, Yuemao Laser paid various expenses on behalf of the Company. As of June 30, 2011, amounts due Yuemao Laser were $332,941. On May 5, 2011, Yuemao Laser and the Company entered into an amendment to loans. The amendment sets forth that all loans the Company borrowed from Yuemao Laser will bear interest at the interest rate of 3.5% per annum starting from January 1, 2011. The Company can make repayment of accrued interest when its cash flow circumstance allows. During the six months ended June 30, 2011, the Company accrued interest of $5,581 on loans from Yuemao Laser.
 
Future Cash Requirements
 
During fiscal 2010, the Company completed the construction of two workshops, one dormitory building and one canteen. The Company estimates that it will need approximately $18 million to complete the construction of a solar cell production facility or to acquire an existing production facility. As a result, the Company expects to require significantly greater capital resources compared to the previous fiscal year.
 
The Company’s cash requirements can be divided into two categories.
 
(1)
Capital demand in daily operations.  This includes costs associated with being a public company, including legal fees, audit/review fees and other professional fees; and costs incurred by the Company’s operating subsidiary, including wages, utilities and other operating costs. The Company expects its cash requirements under this category to be approximately $120,000 per month.
 
(2)
Solar Cell Production Facility.  Capital demand for the construction of its solar cell production facility or to acquire an existing solar cell production facility.
 
As of June 30, 2011, the Company does not have sufficient capital to meet its planned expansion. Due to negative gross profit margins during the six months ended June 30, 2011, the Company does not expect to achieve positive cash flow in the short-term. In addition, given the Company’s short operating history, it is difficult to predict when the Company would begin to generate sufficient cash to support its operations. Therefore, in the foreseeable future related-parties, including the Company’s CEO, Mr. Wensheng Chen and companies that he controls, intend to continue to provide financial resources to meet the Company’s daily operating cash needs. The Company plans to raise funds from domestic and foreign banks and/or financial institutions to increase working capital in order to meet capital demands described in category (2) above.

 
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Without additional funding, the Company will not be able to pursue its business model. If adequate funds are not available or are not available on acceptable terms when required, we would be required to significantly curtail our operations and would not be able to fund the development of the business envisioned by our business model. These circumstances could have a material adverse effect on our business and result in our ability to continue to operate as a going concern.
 
The recent and unprecedented disruption in the credit markets has had a significant impact on a number of financial activities. Additional financing is desirable within the next nine months in order to meet our current and projected cash flow deficits from business operations and future development.
 
Off-Balance Sheet Arrangements
 
As of June 30, 2011, we have not entered any financial guarantees or other commitments to guarantee the payment obligations of any other parties. We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, operating results and cash flows.
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
As a smaller reporting company, we are not required to provide this information.
 
Item 4.
Controls and Procedures
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation 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, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, during the fiscal quarter covered by this report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
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LIMITATION ON THE EFFECTIVENESS OF CONTROLS
 
The inherent limitations of the control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives are being met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
 
PART II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
None.
 
Item 1A. Risk Factors
 
As a smaller reporting company, we are not required to provide this information.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3.
Defaults upon Senior Securities
 
None.
 
Item 4.
(Removed and Reserved.)
 
Item 5.
Other Information
 
None.
 
Item 6.
Exhibits
 
Exhibit No.
 
Description
     
10.1
 
Fengcheng Hong Yu Industrial Development and Investment Co. Loan Agreement
     
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
32.1
 
Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Executive Officer)
     
32.2
  
Certification pursuant to Section 906 of Sarbanes Oxley Act of 2002 (Chief Financial Officer)
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  Universal Solar Technology, Inc.
     
 
By:
/s/ Wensheng Chen
   
Chief Executive Officer and Chairman of the
Board of Directors
   
(Principal Executive Officer)
   
August 12, 2011
     
 
By:
/s/ Xin Ma
   
Chief Financial Officer
   
(Principal Financial and Accounting Officer)
   
August 12, 2011
 
 
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