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EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION BY THE CHIEF EXECUTIVE AND CHIEF FINANCIAL OFFICER.* - CALA ENERGY CORP.f10q0811a1ex31i_xodtec.htm
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EX-32.1 - SECTION 1350 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - CALA ENERGY CORP.f10q0811a1ex32i_xodtec.htm


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

Form 10-Q /A
(Amendment No. 1)
 
 (Mark One)
   
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE QUARTERLY PERIOD ENDED August 31, 2011
   
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM __________ TO __________
 
COMMISSION FILE NUMBER: 333-148005

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

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

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

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

Copies to:
Asher S. Levitsky P.C.
Ellenoff Grossman & Schole LLP
120 East 42nd Street; 11th floor
New York, New York 10017
Phone: (212) 370-1300
Fax: (646) 895-7182
E-mail: alevitsky@egsllp.com

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

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

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

Large accelerated filer    o
Accelerated filer             o
Non-accelerated filer         o
Smaller reporting company x

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

The number of shares of registrant’s common stock outstanding, as of October 15, 2011: 81,771,107
 
 
 

 
 
XODTEC LED, INC.
Form 10-Q /A
For the Quarter Ended August 31, 2011

TABLE OF CONTENTS
 
   
Page
PART I. - FINANCIAL INFORMATION
Item 1.
Financial Statements
3
 
Condensed consolidated Balance Sheets as of August 31, 2011 (unaudited)  and February 28, 2011 (audited)
  3
 
Condensed consolidated Statements of Operations and Comprehensive loss for the three and six months ended August 31, 2011 and 2010 (unaudited)
  4
 
Condensed consolidated Statements of Cash Flows for the six months ended August 31, 2011 and 2010 (unaudited)
  5
 
Notes to Unaudited Condensed consolidated Financial Statements.
  6
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
  14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
  20
Item 4.
Controls and Procedures.
20
     
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings 23 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
23 
Item 6.
Exhibits.
23 
 
 
 

 
EXPLANATORY NOTE
 
This quarterly report on Form 10-Q/A is being filed as an amendment to our quarterly report on Form 10-Q for the six months ended August 31, 2011, which was filed with the Securities and Exchange Commission on October 24, 2011.  This amendment (i) furnishes Exhibit 101 XBRL interactive data files in accordance with Rule 405 of Regulation S-T, and (ii) reflects corrections to typographical errors and other changes as follows:
 
  
Condensed Consolidated Statements of Operations and Comprehensive Loss – The basic and diluted net loss per share for three months ended August 31, 2011 was changed from $(0.01) to $(0.02). 
  
Condensed Consolidated Statements of Cash Flows – The “proceeds from (payment to) loans from related parties” included in the cash flows from financing activities for the six months ended August 31, 2011 was changed from a negative $669,863 to a positive $669,863.
  
Condensed Statements of Cash Flows – A non-cash financing activity line item was added which was omitted from the original filing:  “conversion of debt to equity" in the amount of $2,730,323 for the six months ended August 31, 2011.
  
Notes to Unaudited Consolidated Financial Statements – Inventory disclosure under Note 2 (“Summary of Significant Accounting Policies”) was expanded to include additional information related to inventory reserve activities.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations – A table which provides “Results of Operations” for the three months ended August 31, 2010 was revised to correct the “Other Income” amount from $9,209 to $69,209.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Under the “Liquidity and Capital Resources” in the third paragraph, we added “decrease in inventories of $154,902” to further explain the changes of operating cash flows for the six months ended August 31, 2011.
 
The changes did not change the results of operations or financial position as of August 31, 2011 and for the six months and three months then ended.  No other changes have been made to the Form 10-Q. This Form 10-Q/A does not reflect events that may have occurred subsequent to the original filing date.  Currently dated Exhibits 31.1 and 32.1, signed by the principal executive and financial officer, is included in this filing.
 
FORWARD LOOKING STATEMENTS
 
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
 
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our report on Form 10-K for the year ended February 28, 2011 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC.   You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
 
We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
  
 

 
 
Part I – Financial Statements
 
Item 1.  Financial Statements

 
XODTEC LED, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
 
   
 
 
   
August 31, 2011
   
February 28, 2011
 
   
(unaudited)
       
ASSETS
       
 
 
  Current assets
 
 
   
 
 
Cash and cash equivalents
  $ 14,304     $ 35,652  
Accounts receivable, net of allowances for bad debt of $33,725 and $33,028, respectively
    183,118       185,716  
Other receivables
    83,498       84,753  
Inventories, net
    153,980       -  
Prepayments
    4,542       105,339  
Deferred assets - current portion      57,499        235,292  
Other current assets
    50,405       42,217  
Total current assets
    547,346       688,969  
                 
Property and equipment, net
    107,411       109,642  
 
               
 Other Assets
               
Deposits
    83,050       61,060  
Deferred assets, net of current portion
    250,751       461,958  
Other assets
    229,653       214,950  
                 
Total assets
  $ 1,218,211     $ 1,536,579  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
  Current liabilities
               
Short-term borrowings from banks and others
  $ 278,883     $ 46,469  
Accounts payable
    197,488       289,668  
Other payable
    482,204       471,621  
Accrued liabilities
    463,585       445,611  
Loans from related parties
    553,217       2,541,973  
Other current liabilities
    57,185       259,006  
 
               
Total current liabilities
    2,032,562       4,054,348  
                 
  Long-term liability
    -       9,930  
                 
Total liabilities
    2,032,562       4,064,278  
Commitments and contingencies
               
Stockholders' deficit
               
Preferred stock, par value $0.001 per share, 10,000,000 shares
    -       -  
    authorized and 0 shares issued and outstanding
               
Common stock 225,000,000 authorized shares, par value $0.001 per share;
    81,771       28,865  
81,771,107 and 28,864,827 issued and outstanding, respectively
               
Additional paid in capital
    6,136,924       3,509,507  
Accumulated deficit
    (6,752,428 )     (5,684,006 )
Accumulated other comprehensive loss
    (280,618 )     (382,065 )
                 
Total stockholders' deficit
    (814,351 )     (2,527,699 )
                 
Total liabilities and stockholders' deficit
  $ 1,218,211     $ 1,536,579  
                 
See accompanying notes are an integral part of the financial statements.
 
 
 
3

 
 
XODTEC LED, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
 
COMPREHENSIVE LOSS
 
                         
   
Six months ended August 31,
   
Three months ended August 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net sales
 
$
395,815
   
$
488,438
   
$
168,107
   
$
244,653
 
                                 
Cost of sales    
134,302
     
630,270
     
287,912
     
454,791
 
                                 
Gross profit
   
261,513
     
(141,832
)
   
(119,805)
     
(210,138
)
                                 
Selling, general and administrative expenses
   
1,318,529
     
1,387,326
     
511,592
     
701,928
 
                                 
Operating loss
   
(1,057,016
)
   
(1,529,158
)
   
(631,397
)
   
(912,066
)
                                 
Other income (expense)
                               
Interest income
   
136
     
173
     
136
     
173
 
Interest expense
   
(1,943
)
   
(1,370
)
   
(443
)
   
(674
)
Gain (loss) on exchange
   
1,839
     
(206
)
   
1,146
     
(124
)
Indemnity income
   
-
     
69,360
     
-
     
69,360
 
Gain on change in fair value of accrued derivative liabilities
   
-
     
1,246,423
     
-
     
631,214
 
Other income (expense)
   
(1,068
)
   
3,404
     
286
     
(27
)
Total other income (loss)
   
(1,036
)
   
1,317,784
     
(1,125
)
   
699,922
 
                                 
Loss before income taxes
   
(1,058,052
)
   
(211,374
)
   
(630,272
)
   
(212,144
)
                                 
Income taxes
   
10,370
     
-
     
10,340
         
                                 
Net loss
 
$
(1,068,422
)
 
$
(211,374
)
 
$
(640,612
)
 
$
(212,144
)
                                 
Foreign currency translation adjustments
   
101,447
     
(10,888
)
   
(69,548
)
   
(522
)
                                 
Comprehensive loss
 
$
(966,975
)
 
$
(222,262
)
 
$
(710,160
)
 
$
(212,666
)
                                 
Net loss per share
                               
- Basic and diluted
 
$
(0.03
)
 
$
(0.01
)
 
$
( 0.02
)
 
$
(0.01
)
                                 
Weighted average common shares outstanding
                               
- Basic and diluted
   
35,936,808
     
23,326,201
     
43,008,788
     
23,975,697
 
                                 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
 
4

 
 
XODTEC LED, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             
   
Six months ended August 31,
 
   
2011
   
2010
 
             
Cash Flows from operating activities:
           
Net loss
 
$
(1,068,422
)
 
$
(211,374
)
Adjustments to reconcile net loss to net cash
               
used in operating activities:
               
Depreciation
   
27,346
     
60,565
 
Amortization of deferred assets
   
419,000
     
130,917
 
Allowance for doubtful accounts
   
-
     
30,850
 
(Gain) on change in fair value of accrued derivative liabilities
   
-
     
(1,246,423
)
(Increase) Decrease in assets:
               
Accounts receivable
   
6,554
     
(47,485
)
Other receivables
   
3,061
     
(2,689
)
Inventories
   
(154,902)
     
147,392
 
Prepayments
   
21,461
     
(6,309
)
Other current assets
   
(7,341
)
   
(9,906
)
Deposits
   
(20,827
)
   
(3,133
)
Decrease (Increase) in liabilities:
               
Accounts payable
   
(98,877
)
   
(19,928
)
Other payable
   
642
     
1,964
 
Accrued liabilities
   
8,625
     
117,037
 
Other current liabilities
   
(18,026
)
   
30,600
 
                 
Net cash used in operating activities
   
(881,706
)
   
(1,027,922
)
                 
Cash Flows from Investing activities:
               
Increase in deferred assets
   
-
     
(14,505
)
Purchase of property and equipment
   
(33,007
)
   
(187,863
)
Net cash used in investing activities
   
(33,007
)
   
(202,368
)
                 
Cash flows from financing activities:
               
Proceeds from (payment to) from banks and others
   
222,618
     
(10,089
)
Proceeds from (payment to) loans from related parties
   
669,863
 
   
274,429
 
Proceeds from issuance of common shares
   
-
     
805,724
 
                 
Net cash provided by financing activities
   
892,481
     
1,070,064
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
884
     
914
 
                 
Net decrease in cash and cash equivalents
   
(21,348
)
   
(159,312
)
Cash and cash equivalents, beginning of the period
   
35,652
     
255,884
 
                 
Cash and cash equivalents, end of the period
 
$
14,304
   
$
96,572
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid
 
$
1,943
   
$
1,370
 
Income taxes paid
 
$
861
   
$
-
 
                 
Non-Cash financing activities:                
Conversion of debt to equity   $ 2,730,323      $  -  
                 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
 
5

 
 
XODTEC LED, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2011
 
 
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
Xodtec LED, Inc.  (“Company”) is a Nevada corporation incorporated on November 29, 2006, under the name Sparking Events, Inc.  On June 28, 2009, the Company’s corporate name was changed to “Xodtec Group USA, Inc.” and on May17, 2010 the Company’s corporate name was changed to “Xodtec LED, Inc.”
 
The Company, through its subsidiaries, is engaged in the design, marketing and selling of advanced lighting solutions which are designed to use less energy and have a longer life than traditional incandescent, halogen, fluorescent light sources.  The Company’s wholly-owned subsidiaries, Xodtec Technology Co., Ltd. (“Xodtec”); Targetek Technology Co., Ltd. (“Targetek”); UP Technology Co., Ltd. (“UP”), are organized under the laws of the Republic of China (Taiwan).  The Company also owns a 35% interest in Radiant Sun Development S.A., a company organized under the laws of the Independent State of Samoa (“Radiant Sun”).
 
On April 1, 2009, in anticipation of the exchange agreement described in the following paragraph, APlus International, Ltd., a Nevada limited liability company (“APlus”), acquired all of the capital stock of Xodtec, Targetek and UP, pursuant to agreements with the shareholders of each of these companies (The application of domestic investment by foreign nationals governed by the Investment Commission of the Republic of China is still in the process ) and acquired a 35% interest in Radiant Sun pursuant to an agreement with the holders of 35% of the capital stock of Radiant Sun.  As a result of these agreements, the former shareholders of Xodtec, Targetek and UP and the former holders of 35% of the stock of Radiant Sun become the sole members of APlus.
 
On April 20, 2009, the Company entered into an exchange agreement with APlus and its members pursuant to which the Company, then known as Sparking Events, Inc. acquired all of the stock of Xodtec, Targetek and UP and APlus’ 35% interest in Radiant Sun in exchange for 16,000,002 shares of common stock.  The transaction pursuant to which the Company issued 16,000,002 shares of common stock to the former members of APlus in exchange for all of the stock of Xodtec, Targetek and UP and APlus’ 35% interest in Radiant Sun is referred to as the reverse acquisition.
 
Simultaneously with the reverse acquisition, the Company’s then principal stockholder transferred to the Company for cancellation, without consideration, 27,000,000 shares of common stock owned by him.
 
At the time of the reverse acquisition, the Company was a blank check shell company and was not engaged in any business.  Upon completion of the reverse acquisition, the Company’s business became the business of Xodtec, Targetek and UP.  Radiant Sun did not have any significant operations prior to the reverse acquisition.
 
Under generally accepted accounting principles, the acquisition by the Company of Xodtec, Targetek and UP is equivalent to the acquisition by APlus of the Company, then known as Sparking Events, Inc., with the issuance of stock by APlus for the net monetary assets of the Company.  This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure.  Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse acquisition accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, APlus.   Since APlus was organized to acquire Xodtek, Targetek and UP on April 1, 2009, and had no operations, the Company’s historical financial statements reflect the operations of Xodtek, Targetek and UP prior to April 1, 2009, the combined operations of APlus, Xodtek, Targetek and UP from April 1, 2009 to April 20, 2009, and the combined operations of these companies and the Company from April 20, 2009.  The accompanying financial statements reflect the recapitalization of the shareholders’ equity as if the transactions occurred as of the beginning of the first period presented.  Thus, only the 16,000,002 shares of common stock issued to the former APlus members are deemed to be outstanding for all periods reported prior to the date of the reverse acquisition.   The 1,380,000 shares of common stock that were outstanding on April 20, 2009, after giving effect to the cancellation of the 27,000,000 shares that were acquired by the Company and cancelled, are treated as if they were issued on April 20, 2009, as part of a recapitalization.
 
 
6

 
 
The Company has the following operating subsidiaries:
 
-  
Xodtec Technology Co., Ltd., was set up on February 5, 2005 is mainly engaged in LED lighting ODM/OEM and distribution in Taiwan business.
-  
UP Technology Co., Ltd., was set up on January 9, 1997 and is mainly engaged in LED lighting product distribution in Taiwan business.
-  
Targetek Technology Co., Ltd., was set up on March 26, 1997 and is mainly engaged in professional translation business.
 
The Company’s authorized capital stock consists of 10,000,000 shares of preferred stock, par value $0.0001 per share, and 225,000,000 shares of common stock, par value $0.001 per share. The board of directors has broad discretion in determining the rights, preferences and privileges of the holders of one or more series of preferred stock. The Company changed the par value of its preferred stock from $0.0001 to $0.001 on March 31, 2010 and restored the 10,000,000 shares of preferred stock which had previously been designated as series A convertible preferred stock to the status of authorized and unissued shares of preferred stock with no designation as to class or series.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidation financial statements and notes thereto for the fiscal year ended February 28, 2011 included in the Company’s Form 10-K. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented. The operating results and cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.
 
Certain prior year amounts have been reclassified to conform with the current period’s presentation, none of which had an impact on total assets, stockholders’ equity (deficit), net loss, or net loss per share.

The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the six months ended August 31, 2011, the Company incurred a net loss of approximately $1.0 million and an operating loss of approximately $1.1 million.  The Company had a negative cash flow in operating activities amounting approximately $0.8 million in the six months ended August 31, 2011, and the Company’s accumulated deficit was approximately $6.9 million as of August 31, 2011. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company may seek additional funding through additional issuance of common stock and/or borrowings from financial institutions and defer the amounts due under the credit line. Management believes that actions presently being taken to obtain additional funding could provide the opportunity for the Company to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries Xodtec Technology Co., Ltd., UP Technology Co., Ltd., and Targetek Technology Co., Led. All material intercompany accounts, transactions, and profits have been eliminated in consolidation.

Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.
 
Segment Information
 
ASC 280 requires companies to report information about operating segment in interim and annual financial statements. It also requires segment disclosures about products and services geographic and major customers. The Company has determined that it does not have any separately reportable operating segments.
 
Revenue Recognition
 
The Company’s revenue recognition policies are in compliance with ASC 605 (Originally issued as Staff Accounting Bulletin (SAB) 104). Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.   Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Sales taxes are not recorded as a component of sales.
 
Cost of Sales
 
The cost of revenue represents, primarily, the cost of manufacturing by third party manufacturers based on a contract price, as well as warehousing costs, shipping and handling costs, and any cost related inventory adjustment, including write downs for excess and obsolete inventory.
 
 
7

 
 
Advertising Expense

Advertising costs are expensed as incurred.  The Company has advertising expense amount of $0 and $10,646, for the six months ended August 31, 2011 and 2010, respectively.
 
Shipping and Handling Costs
 
The Company records all charges for outbound shipping and handling as revenue. All compounding shipping and handling costs are classified as cost of goods sold.
 
Accounts Receivable
 
Accounts receivable are carried at original invoice amount less the allowance for doubtful accounts based on a review of all outstanding amounts at year end. Management determines the allowance for doubtful accounts by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible.
 
Inventories
 
The Company’s inventories are stated at the lower-of-cost-or-market price.  Cost is determined on the weighted average method which approximates actual cost. The Company provides for a lower-of-cost-or-market and excess and obsolete allowances against gross inventory values. For the six months and three months ended August 31, 2011, the company sold approximated $220,000 and $130,00, respectively of inventories which were fully reserved as of February 28, 2011. These amounts were recorded as a cost of sales for the six months and threee months ended August 31, 2011.
  
Equity Investment
 
The Company accounts for its interest in its equity investments pursuant to ASC 323 “Investment – Equity Method and Joint Ventures,” which sets forth guidance as to the treatment of equity investments. Because the Company only unconsolidated subsidiary is inactive, does not meet the test of a significant subsidiary under Rule 1-02(w)of Regulation S-X and any summarized information is de minimus, the Company is not required to include summarized financial information with respect to this entity and the absence of summarized financial information does not impact its consolidated financial statements.
 
Property and Equipment
 
Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Major improvements and addition which can prolong the service life of fixed assets are counted as capital expenditures and recorded as fixed assets. Expenditures on regular repairs and maintenance are recorded as expenses.
 
Property and equipment are depreciated according to the service life and using the average method, with one-year residual value. Additions are depreciated according to their respective estimated service life. Major improvements are depreciated based on the remaining service lives of fixed assets. While assets are continually in use after the expiration of its service life, the residual values and service lives are estimated and depreciated accordingly and continually. The gain (loss) on disposal of assets is recognized as non-operating revenue (expenditure) in the period of sale or disposal.
 
Depreciation is computed using the straight-line method over the estimated useful lives as follows:
 
 
Useful Lives (Years)
Transportation
5 years
Office equipment
3-6 years
Machinery
3-6 years
Equipments for leases
12 years
Other equipment
3-6 years
 
Impairment of Long-Lived Assets
 
The Company accounts for the impairment and disposition of long-lived assets in accordance with ASC 360, Property, Plant and Equipment. The Company periodically evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset were less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.
 
The assumptions used by management in determining the future cash flows are critical. In the event these expected cash flows are not realized, future impairment losses may be recorded.
 
 
8

 
 
Subscription Receivable
 
The subscription receivable reflects the sales of common stock in July 2009 for which the Company had not received payment as of August 31, 2011 or February 28, 2011, and which was written off and recorded as an adjustment to additional paid in capital during the quarter ended August 31, 2011.
  
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when, in the opinion of management, it is more likely than not that some or all of any deferred tax assets will not be realized.
 
The Company adopted ASC 740-10-25, Income Taxes- Overall-Recognition, on January 1, 2007, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company did not recognize any additional liabilities for uncertain tax positions as a result of the implementation of ASC 740-10-25.
 
Net Loss per Share
 
The Company calculates its basic and diluted earnings per share in accordance with ASC 260. Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive warrants and options and convertible securities. There were no convertible securities outstanding during the six months ended August 31, 2011.  The Company uses the treasury stock method to reflect the potential dilutive effect of the unvested stock options and unexercised warrants. Because the Company incurred losses for the six months ended August 31, 2011, the number of basic and diluted shares of common stock is the same since any effect from outstanding warrants would be anti-dilutive.
 
Gain (Loss) on Exchange
 
Foreign-currency transactions are recorded in New Taiwan dollars (“NTD”) at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into NTD, or when foreign-currency receivables or payables are settled, are credited or charged to income in the year of conversion or settlement. On the balance sheet dates, the balances of foreign-currency assets and liabilities are restated at the prevailing exchange rates and the resulting differences are charged to current income.
 
Translation Adjustment
 
The Company’s financial statements are presented in the U.S. dollar ($), which is the Company’s reporting and functional currency. The functional currency of the Company’s subsidiaries is NTD. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of operations.
 
In accordance with ASC 830, Foreign Currency Matters, the Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD into U.S. dollar are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for interim financial statements in accordance with ASC 830, Foreign Currency Matters, are as follows:
 
 
9

 
 
   
Average Rate for the three months
 
August 31,
 
2011
   
2010
 
Taiwan dollar (NTD)
 
NTD 28.95313
   
NTD 32.10883
 
United States dollar ($)
 
$
1.00000
   
$
1.00000
 
 
 
   
Average Rate for the six months
 
August 31,
 
2011
   
2010
 
Taiwan dollar (NTD)
 
NTD 29.02550
   
NTD 31.92033
 
United States dollar ($)
 
$
1.00000
   
$
1.00000
 
                 
   
Exchange Rate at
 
August 31,
   
2011
     
2010
 
Taiwan dollar (NTD)
 
NTD 29.19920
   
NTD 32.06000
 
United States dollar ($)
 
$
1.0000
   
$
1.0000
 
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income (loss) on its statements of stockholders’ equity.
 
Share Based Expenses
 
ASC 718 requires a public entity to expense the cost of employee and non-employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements.  The Company expenses share-based costs in the period incurred.
 
NOTE 3 - FAIR VALUE MEASUREMENTS
 
The carrying values of cash and cash equivalents, notes receivable, accounts receivable, other receivable, inventories, prepayments, other current assets, short-term borrowings from banks and others, notes payable, accounts payable, other payable, accrued liabilities, loan from related parties and other current liabilities approximate the related fair values due to the short-term maturities of instruments.
 
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
 
The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.

NOTE 5 – INVENTORIES
 
As of August 31, 2011 and February 28, 2011, the Company’s inventory consisted of raw material, work in progress and finished goods as follows:
 
  
 
August 31,
2011
   
February 28,
2011
 
Raw material
 
$
356,713
   
$
199,757
 
Work-in-process
   
50,267
     
77,015
 
Finished goods
   
165,595
     
326,100
 
 Gross inventory
 
$
572,575
   
$
602,872
 
 Less inventory reserve
   
(418,595) 
     
(602,872) 
 
 Net inventory
 
$
153,980
   
$
-
 
 
 
10

 
 
NOTE 6 – PROPERTY AND EQUIPMENT
  
Property and equipment consisted of the following:

  
 
August 31,
2011
   
February 28,
2011
 
Transportation
 
$
1,720
   
$
1,684
 
Office equipment
   
116,150
     
104,019
 
Machinery
   
53,406
     
52,303
 
Total property and equipment
   
171,276
     
158,006
 
Accumulated depreciation
   
(63,865
)
   
(48,364
)
Total property and equipment, net
 
$
107,411
   
$
109,642
 

Depreciation expenses during the six months ended August 31, 2011 and 2010 were $27,346 and $60,565, respectively. Depreciation expense during the three months ended August 31, 2011 and 2010 were $14,872 and $34,738, respectively.
 
NOTE 7 – DEFERRED ASSETS
 
Deferred assets consisted of the following:
 
   
August 31,
2011
   
Februaery 28,
2011
 
Deferred professional fee - current   $ 230,000     $ 447,500  
Deferred professional fee - non-current     451,500       511,500  
Total deferred professinal fee gross     681,500       959,000  
Accumulated amortization     (373,250 )     (261,750 )
Total deferred professional fee, net     308,250       697,250  
Less: Current portion   $ 57,499     $ 235,292  
Long-term portion   $ 250,751     $ 461,958  
 
Amortization expense during the six months ended August 31, 2011 and 2010 were $419,000 and $130,917, respectively. Amortization expense during the three months ended August 31, 2011 and 2010 were $128,333 and $48,292, respectively.
 
NOTE 8 – OTHER ASSETS
 
Other assets consisted of the following:

   
August 31, 
2011
   
February 28,
2011
 
Idle asset held for sales - equipment
 
$
174,569
   
$
170,964
 
Prepayment of property and equipment
   
22,874
     
-
 
Other prepayment - non-current     32,210       43,986  
Total other assets
 
$
229,653
   
$
214,950
 

Idle asset represents equipment held for sales and it is reported at the lower of the carrying amount or fair values less estimated cost of sale. As of August 31, 2011, the net realizable value of this idle asset was $174,569. This equipment has been used for an energy saving contract, which has been terminated, and this equipment does not have other usage. The Company has other payable regarding this equipment as of August 31, 2011 and February 28, 2011 of $480,830 and $470,899, respectively.
 
NOTE 9 – SHORT-TERM BORROWINGS FROM BANKS AND OTHERS
 
Short-term borrowings consisted of the following at August 31, 2011 and February 28, 2011:
 
   
August 31,
2011
   
February 28,
2011
From First Bank, interest at 4.94%, maturity date July 1, 2012
 
$
22,026
   
$
32,921
 
Unrelated party loan, free interest and due on demand
   
17,124
     
23,478
 
From Taiwan Business Bank, interest at 3.75%, maturity date August 15, 2012
   
239,733
         
Total
   
278,883
     
56,399
 
Current portion
 
$
278,883
   
$
46,469
 
Long-term portion
 
$
-
   
$
9,930
 
 
Interest expenses during the six months ended August 31, 2011 and 2010 were $1,943 and $1,370, respectively. Interest expense during the three months ended August 31, 2011 and 2010 were $433 and $674, respectively. 
 
 
11

 
 
NOTE 10 – ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

   
August 31,
2010
   
February 28,
2011
Accrued salaries
 
$
312,385
   
$
184,531
 
Accrued professional fee
   
63,698
     
85,333
 
Accrued others
   
  87,502
 
   
175,747
 
Total
 
$
463,585
   
$
445,611
 
 
NOTE 11 – RELATED PARTY TRANSACTIONS
 
   
August 31,
2010
   
February 28,
2011
Non interest bearing and payable on demand to Chief Executive Officer of the Company
 
$
167,892
   
$
804,821
 
Non interest bearing and payable on demand to its directors of the Company
   
347,310
     
1,498,665
 
Non interest bearing and payable on demand to three shareholders of the Company
   
38,015
 
   
238,487
 
Total
 
$
553,217
   
$
2,541,973
 
 
NOTE 12 - COMMITIMENTS AND CONTINGENCIES
 
The Company rents offices under several operating leases. The Company’s minimum rent for the future is following as:
 
Twelve months ending
 
Amounts
 
    August 31, 2012
 
$
221,244
 
    August 31, 2013
 
$
142,646
 
    August 31, 2014
 
$
121,273
 
         
 
The Company restated its financial statements at February 28, 2009, for the year then ended, and for each quarter in the fiscal year ended February 28, 2010.  The Company cannot determine whether it will incur any liability as a result of such restatement.
 
NOTE 13 – CAPITAL STOCK AND SHARE-BASED PAYMENTS
  
On July 1, 2011, the Company entered debt cancellation agreement with a director pursuant to which the Company issued 2,000,000 shares of common stock to cancel the Company’s indebtedness in the principal amount of $200,000.

On July 11, 2011, the Company entered into a one-year contract with one consultant pursuant to which consultant is to provide services in connection with the Company’s expansion into China. Pursuant to the contract, the Company issued 300,000 shares of common stock to the consultant, which were valued at $30,000. 

On August 5, 2011, the Company entered debt cancellation agreements with the Company’s chief executive officer and a director which the Company issued 16,447,160 and 34,159,120 shares of common stock to cancel the Company’s indebtedness in the principal amount of $822,358 and $1,707,965, respectively.

The Company issued the 700,002 shares of common stock and warrants to purchase 1,750,000 shares of common stock in 2009.  All warrants had expired unexercised in April 2011.  

Warrant activity for the year ended February 28, 2011 and the six months ended August 31, 2011, is summarized as follows:
 
  
 
Shares subject to
Warrants
   
Weighted Average
 Exercise Price
 
Balance at February 28, 2010
 
2,550,000
   
$
1.35
 
Granted
 
-
         
Exercised
 
-
         
Cancelled
 
(1,000,000)
     
  1.50
 
Forfeited or expired
 
-
         
Balance at February 28, 2011
 
1,550,000
     
1.26
 
Granted
   
-
         
Exercised
   
-
         
Cancelled
   
-
         
Expired
   
(1,550,000)
   
$
1.26
 
Balance at August 31, 2011
   
-
   
$
-
 
 
 
12

 
 
NOTE 14 - CONCENTRATION
 
-  
Major customers
 
The following table provides information as to sales to each customer who accounted for at least 10% of the Company’s revenue for the six months ended August 31, 2011 and 2010, respectively, and the accounts receivable from such customers:
 
   
Revenue
Six Months Ended August 31,
   
Percentage of Total Revenue
   
Accounts Receivable
At August 31,
 
2011
                 
-Customer A
 
$
120,209
     
30
%
 
$
77,880
 
                         
2010
                       
-Customer B
 
$
65,789
     
13
%
 
$
68,114
 
-Customer A
   
54,842
     
11
%
   
11,555
 
-Customer C
   
49,494
     
10
%
   
-
 
                         
 
Substantially all of the Company’s revenue is derived from sales of LED lighting products.  Any significant decline in market acceptance of the Company’s products or in the financial condition of the Company’s existing customers could impair the Company’s ability to operate effectively.
 
-  
 Major suppliers
 
The following table provides information as to purchase to each major supplier who accounted for 10% or more of the Company’s purchases for the six months ended August 31, 2011 and 2010, respectively, and the accounts payable to such suppliers:
 
   
Purchase
Six months Ended August 31,
   
Accounts /Notes Payable
At August 31,
 
2011
           
-Vendor A
 
$
72,212
   
$
39,474
 
-Vendor B
   
28,471
     
-
 
-Vendor C
   
26,079
     
12,333
 
2010
               
-Vendor A
   
61,386
     
35,390
 
                 
   
NOTE 15– INCOME TAXES
 
The Company did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because the Company has experienced operating losses for U.S. federal income tax purposes since inception. When it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit.  The Company pays income taxes under the laws of the Republic of China (Taiwan).  For the six months ended August 31, 2011 and 2010, the Company has income tax amount of $10,370 and $0, respectively. For the three months ended August 31, 2011 and 2010, the Company has income tax amount of $10,340 and $0, respectively.
 
NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS)
 
Balances of related after-tax components comprising accumulated other comprehensive loss, included in stockholders’ equity and at August 31, 2011 and February 28, 2011 are as follows:
 
  
 
Foreign Currency Translation Adjustment
 
Balance at February 28, 2011
 
$
(382,065)
 
Change in foreign currency translation
   
101,447
 
Balance at August 31, 2011
 
$
(280,618)
 
 
 
13

 

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

The following discussion of the results of our operations and financial condition should be read in conjunction with our financial statements and the related notes, which appear elsewhere in this report. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see “Forward Looking Statements.”

Overview

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

Revenue is derived from sales of our advanced lighting products and systems.   In marketing our products, we sell LED products as stand-alone items to customers who want to purchase the LED products without any related services, and we provide project services, which include the design, implementation and related consulting services as well as the LED products.

Our ability to be successful is dependent upon our ability to offer customers lighting solutions that require our know-how in designing a system to meet the specific needs of the customer at a cost which is acceptable to the customer.  To the extent that stand-alone LED products are commodities with the customer looking solely to price, we will need to distinguish ourselves by offering solutions which include the LED product is an element.  At present, our gross margin on LED products is significantly less than our gross margin on project-based lighting solutions.    To the extent that we offer low prices for the LED products and are not able to combine the low prices for the LED prices with a project which also requires our services, our ability to operate profitably will be impaired, especially to the extent that LED users do not seek services as part of a project.  We cannot assure you that we will be successful in marketing projects which require our know-how in the design of a lighting solution or that we will ever be able to operate profitably.

We require significant cash for the development of our business.  Offering project-based solutions and offering lighting solutions where our revenue is dependent on the customers’ cost savings is very capital intensive, since we will have to finance both the LED products and the design and other services significantly in advance of receipt of payment.  Our failure to obtain the necessary funding will impair our ability to generate revenue from this type of sale.  To the extent that we have to rely on the sale of LED products, our margins, as well as our ability to operate profitably, will be impaired.

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

Effect of Absence of Financial Controls; Prior Restatement of Financial Statements

Our financial statements at February 28, 2010 and for each quarter in the year ended February 28, 2010 were restated to reflect corrections in the statements previously provided. Such restated financial statements have been included in our prior reports filed with the SEC.  In connection with our financial statements for the fiscal year ended February 28, 2010 and each quarter in that year, we determined that securities issued to an investor were derivative instruments that required us to record the fair value of such instruments as derivative liabilities in accordance with ASC 815 “Derivatives and Hedging.” In addition, since it was possible that we would not have a sufficient number of authorized and unissued shares at February 28, 2010 to settle its other outstanding warrants, which were issued prior to September 29, 2009, in common stock, we reclassified the fair value of such warrants from equity to accrued derivative liabilities as of September 29, 2009. Our financial statements for the year ended February 28, 2010 and for each quarter in the fiscal year have been restated to reflect such correction.  As of February 28, 2011 and August 31, 2011, there were no derivative securities outstanding.
 
 
14

 
 
Although we are taking steps to implement financial controls so that the transactions to which we are a party are accounted for in accordance with generally accepted accounting principles consistently applied , we cannot assure you that we will be able to implement financial controls in a timely manner or that our controls will be effective.

Significant Accounting Estimates and Policies

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

Revenue Recognition

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

Cost of Revenue

The cost of revenue represents, primarily, the cost of manufacturing by third party manufacturers based on a contract price, as well as warehousing costs, shipping and handling costs, and any cost related inventory adjustment, including write downs for excess and obsolete inventory.  During the three and six months ended August 31, 2010, cost of revenue reflects a writedown of inventory and during the three and six months ended August 31, 2011.
 
Shipping and Handling Costs

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

Accrued Derivative Liabilities

The Company applies ASC Topic 815, “Derivatives and Hedging,” which provides a Monte Carlo Simulation model to determine the instruments issued pursuant to the subscription agreement not indexed to an issuer’s own stock and thus able to qualify for derivative liabilities treatment. The Company determines which instruments require liability accounting, and records the fair values as an accrued derivative liability. The changes in the values of the accrued derivative liabilities are shown in the accompanying statement of operations as “gain on change in fair value of accrued derivative liabilities.” During the year ended February 28, 2010, the Company determined that there were derivatives and accrued derivative liabilities. During the year ended February 28, 2011, the conditions that gave rise to the derivative liability terminated and at February 28, 2011, there was no longer any derivative liability.  The changes in the value of these derivatives are shown in the accompanying statement of operations as “gain on change in fair value of accrued derivative liabilities.”  The gain in change in fair value of derivative liabilities for the three months ended August 31, 2011 and 2010 was $0 and $1,246,423, respectively.  There was no derivative liability at February 28, 2011 or August 31, 2011.

Comprehensive Income

Comprehensive income includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income on its statements of stockholders’ equity.
 
 
15

 

Income Taxes

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

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

Inventories

The Company’s inventories are stated at the lower-of-cost-or-market price.  Cost is determined on the weighted average method which approximates actual cost . The Company provides for a lower-of-cost-or-market  and excess and obsolete allowances  against gross inventory values. For the six months and three months ended August 31, 2011, the Company sold approximately $220,000 and $130,000, respectively of inventories which were fully reserved as of February 28, 2011. These amounts were recorded as a cost of sales for the six months and three months ended August 31, 2011 .
 
Property and Equipment

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

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

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

 
Useful Lives (Years)
Transportation
5 years
Office equipment
5 years
Machinery
3-6 years
Equipment for leases
12 years
Other equipment
3-6 years
 
 
16

 
 
Results of Operations

Three months ended August 31, 2011 and 2010

The following table sets forth the results of our operations for the three months ended August 31, 2011 and 2010 in dollars and as a percentage of revenues:

   
Three Months Ended August 31,
 
   
2011
   
2010
 
   
Dollars
   
%
   
Dollars
   
%
 
Net sales
 
 $
168,107
     
100.0
%
 
 $
244,653
     
100.0
%
Cost of sales
   
287,912
     
171,.3
%
   
454,791
     
185.9
%
Gross profit
   
(119,805)
 
   
(71.3)
%
   
(210,138)
     
(85. 9
)%
Selling, general and administrative expenses
   
511,592
     
304.3
%
   
701,928
     
286.9
%
Operating loss
   
(631,397)
     
(375.6
)%
   
(912,066)
     
(372.8
)%
Interest expense, net
   
(307
)
   
(0.2
)%
   
(501)
     
(0.2
)%
Gain on change in fair value of accrued derivative liability
   
  -
     
0.0
%
   
631,214
     
258.0
%
Other income
   
1,432
     
0.9
%
   
69,209
     
28.3
%
Income tax
   
10,340
     
6.2
%
   
-
     
0.0
%
Net loss
 
$
(640,612)
     
(381.1
)%
 
 $
(212,144)
     
(86.7
)%

Net Sales.  Net sales for the three months ended August 31, 2011 was $168,107, a decrease of $76,546, or approximately 31.3%, from net sales of $244,653 for the three months ended August 31, 2010.   The decrease in net sales for the quarter ending August 31, 2011 resulted from a decrease demand in sales from LED products and a reduction in sales of LED lighting solutions.  LED product sales produce lower gross margins than sales of LED lighting solutions. We previously initiated a lower pricing strategy as we hope to establish our LED products in the marketplace.  However, we cannot give any assurance that we will be able to sell our products at prices which will enable us to operate profitably.

Gross Profit/ Gross Margin.   For the three months ended August 31, 2011, our negative gross profit was ($119,805), resulting in a gross margin of (71.3)%, as compared with a negative gross profit of ($210,138) and a negative gross margin of (85.9)% for the comparable quarter of 2010. The increase in gross margins reflects the reversal of the company previously reserved inventory which has been sold out during this quarter. As a result of our pricing strategy, which sought to generate volume by offering a lower price, we had written off slow-moving inventory.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased from $701,928 in the quarter ended August 31, 2010 to $511,592 in the quarter ended August 31, 2011, a decrease of $190,336, or approximately 27.1%. This decrease reflects lower expenses related to our business development and marketing efforts seeking to expand into the People’s Republic of China.
 
 
17

 
 
Gain on Change in Value of Accrued Derivative Liabilities.    During the year ended February 28, 2010, we issued shares of common stock pursuant to an agreement which required us to issue additional shares of common stock if we sold shares at a price which was less than $0.70 per share and warrants which had anti-dilution provisions which could have resulted in the Company being required to settle its common stock obligations by issuing more than the number of authorized and unissued shares of common stock. As a result of such provisions, we incurred derivative liabilities. During the quarter ended August 31, 2010, we recognized a gain of approximately $631,214 reflecting the change in fair value of the accrued derivative liability.  The change reflects a difference in the valuation of the derivative liability during the period, using the Monte Carlo simulation model, takes into effect a number of factors, including changes in the market price of the common stock. We had no derivative liabilities at either February 28, 2011 or August 31, 2011.
 
Other Income (Expense).  Other income, consisting of interest expense, gain (loss) on exchange and other income (expense) was not material for the three month periods ended August 31, 2011 or 2010.

Six months ended August 31, 2011 and 2010

The following table sets forth the results of our operations for the six months ended August 31, 2011 and 2010 in dollars and as a percentage of revenues:
 
   
Six Months Ended August 31,
 
   
2011
   
2010
 
   
Dollars
   
%
   
Dollars
   
%
 
Net sales
 
 $
395,815
     
100.0
%
 
$
488,438
     
100.0
%
Cost of sales
   
134,302
     
33.9
%
   
630,270
     
129.0
%
Gross profit
   
261,513
     
66.1
%
   
(141,832
   
(29.0)
%
Selling, general and administrative expenses
   
1,318,529
     
333.1
%
   
1,387,326
     
284.0
%
Operating loss
   
(1,057,016
)
   
(267.0
)%
   
(1,529,158)
     
(313.1
)%
Interest expense, net
   
(1,807
)
   
(0.5
)%
   
(1,197)
     
(0.2
)%
Gain on change in fair value of accrued derivative liability
   
  --
     
0.0
%
   
1,246,423
     
255.2
%
Other income (expense)
   
771
     
0.2
%
   
72,558
     
14.9
%
Income tax
   
10,370
     
2.6
%
   
--
     
0.0
%
Net loss
 
$
(1,068,422
   
(270,0
)%
 
 $
 (211,374)
     
(43.3)
%
 
Net Sales.  Net sales for the six months ended August 31, 2011 were $395,815, a decrease of $92,623, or approximately 19.0%, from revenues of $488,438 for the six months ended August 31, 2010.   The decrease in net sales for the six months ending August 31, 2011 resulted from a decrease in demand sales from LED products and a reduction in sales of LED lighting solutions.  LED product sales produce lower gross margins than sales of LED lighting solutions. We previously initiated a lower pricing strategy as we hope to establish our LED products in the marketplace.  However, we cannot give any assurance that we will be able to sell our products at prices which will enable us to operate profitably.

Gross Profit/ Gross Margin.   For the six months ended August 31, 2011, our gross profit was $261,513, resulting in a gross margin of 66.1%, as compared with a negative gross profit of ($141,832), and a negative gross margin of (29.0)% for the comparable period of 2010. The increase in gross margins reflects the reversal of the company previously reserved inventory which has been sold out during this quarter As a result of our pricing strategy, which sought to generate volume by offering a lower price, we had written off slow-moving inventory.
 
18

 
 
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased from $1,387,326 in the six months ended August 31, 2010 to $1,318,529 in the six month period ended August 31, 2011, a decrease of $68,797, or approximately 4.95%. This decrease reflects lower expenses related to our business development and marketing efforts seeking to expand into the People’s Republic of China.
 
Gain on Change in Value of Accrued Derivative Liabilities.    During the year ended February 28, 2010, we issued shares of common stock pursuant to an agreement which required us to issue additional shares of common stock if we sold shares at a price which was less than $0.70 per share and warrants which had anti-dilution provisions which could have resulted in the Company being required to settle its common stock obligations by issuing more than the number of authorized and unissued shares of common stock. As a result of such provisions, we incurred derivative liabilities. During the six months ended August 31, 2010, we recognized a gain of $1,246,423 reflecting the change in fair value of the accrued derivative liability.  The change reflects a difference in the valuation of the derivative liability during the period, using the Monte Carlo simulation model, takes into effect a number of factors, including changes in the market price of the common stock. We had no derivative liabilities at either February 28, 2011 or August 31, 2011.
 
Other Income.  Other income, consisting of interest expense, gain (loss) on exchange and other income (expense) was not material for the six month periods ended August 31, 2011 or 2010.
 
Liquidity and Capital Resources:
 
 
19

 
 
Our working capital deficiency increased by $1,880,163, from a deficiency of $3,365,380 at February 28, 2011 to a deficiency of $1,485,216 at August 31, 2011.

During the six months ended August 31, 2011, we financed our operations principally through the loans from company officers and directors as well as bank loans.

During the six months ended August 31, 2011, we used $881,706 in our operations, principally reflecting our loss of $1,068,422, the issuance of equity for compensation of $419,000 , decrease in inventories of $154,902 , and a decrease in accounts payable of $98,722. Cash flow used in investing activities was not significant, consisting of prepayments and purchase of property and equipment.  Cash flow from financing activities was $892,481, consisting primarily of proceeds of loans from related parties.
 
As of August 31, 2011, we owed a total of approximately $ 0.55 million to related parties – our chief executive officer and one of our directors and the president of one of our subsidiaries.  The borrowings do not bear interest and are payable on demand.
 
We incurred a loss from operations of $1.1 million for the six months ended August 31, 2011, compared to a loss from operations of $1.5 million for the six months ended August 31, 2010. Consequently, we may not have sufficient liquidity necessary to sustain operations for the next twelve months and raises substantial doubt that we will be able to continue as a going concern.
 
We believe that we require significant financing for our operations, but based on our low gross margin, losses from operations, working capital deficiency and negative stockholders’ equity, combined with our low stock price and the absence of an active trading market in our stock, we may difficulty raising additional funds through the sale of our equity or debt securities.  The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required for smaller reporting companies.

ITEM 4.  CONTROLS AND PROCEDURES.

Our management, including Yao-ting Su, our chief executive and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of August 31, 2011.
 
 
20

 
 
Evaluation of Disclosure Controls and Procedures

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

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive and financial officer. Based on that evaluation, our chief executive and financial officers concluded that because of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of August 31, 2011.

Management’s Report of Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act.  Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Management assessed the effectiveness of our internal control over financial reporting.  In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.

As previously reported, during our assessment of the effectiveness of internal control over financial reporting at February 28, 2011, management identified material weaknesses related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and, and (iii) a lack of segregation of duties within accounting functions.

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

We became a reporting company in April 2009.  At the end of our fiscal year ended February 28, 2009, and until April 2009, when we completed the reverse acquisition, we were operating as three privately-owned companies whose operations were not consolidated for financial reporting purpose.  Our business is located in the Republic of China and our products are manufactured for us by third parties in the People’s Republic of China.  We began preparing to be in compliance with the internal control obligations, including Section 404, for our fiscal year ending February 28, 2010. During almost all of fiscal 2010 our internal accounting staff was primarily engaged in ensuring compliance with Republic of China accounting and reporting requirements for our operating affiliates and was not required to meet or apply U.S. GAAP requirements.  As a result, with the exception of certain additional persons hired at the end of 2010 to address these deficiencies, our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the Republic of China, management has determined that they require additional training and assistance in US GAAP matters, which is reflected in our need to restate our financial statements for each of the quarters in the fiscal year ended February 28, 2010.  Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.  Finally, management determined that the lack of an audit committee of the board of directors of the Company also contributed to insufficient oversight of our accounting and audit functions.  In addition, the same person serves as both our chief executive offer and our chief financial officer.

In order to correct the foregoing deficiencies, we are seeking to engage an experienced accountant or firm to assist us in establishing procedures that will enable us to have, on an ongoing basis, personnel who understand US GAAP and the disclosure obligations under the Securities Exchange Act. We are committed to the establishment of effective internal audit functions, however, due to the scarcity of qualified candidates with extensive experience in US GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit resources in order to enable us to have such procedures and controls established by August 31, 2011.
 
 
21

 
 
Our material weaknesses related to:

·  
An insufficient complement of personnel in our corporate accounting and financial reporting function with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complex financial accounting and reporting requirements and materiality thresholds.
 
·  
Lack of familiarity with the accounting treatment of the issuance of equity in consideration of services rendered and with the accounting aspects of reverse acquisition accounting and the treatment of derivative securities.
 
·  
Lack of documentation relating to sales or other dispositions of inventory.
 
·  
Lack of internal audit function - the monitoring function of internal control is not well performed due to insufficient resources. In addition, the scope and effectiveness of internal audit function have yet to be developed. 
 
·  
Lack of written policies and procedures relating to periodic review of current policies and procedures and their implementation.
 
·  
The absence of an audit committee comprised of independent directors.
 
We also intend to elect additional directors, who will be independent and one of whom could serve as the audit committee financial expert. We believe that the appointment of such directors will strongly influence our management in establishing the necessary controls; however, in view of our financial condition, the results of our operations, our need to restate prior period financial statements, our significant inventory writeoff or subsequent reversal of our inventory writeoff, our low stock price and lack of an active market in our common stock are among the factors which make it difficult for us to appoint independent directors, particularly director who would serve on our audit committee.

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

We believe that the foregoing steps will remediate the material weaknesses identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.  However, both our financial condition and our size may make it difficult for us to hire the qualified personnel which we require.

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

Remediation and Changes in Internal Control over Financial Reporting

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

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

Limitations on Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within us have been detected.
 
 
22

 
 
PART II - OTHER INFORMATION

ITEM 1. LEGAL PRCEEDINGS

None
 
ITEM 1A. RISE FACTORS

There have been no material changes to the risk factors indentified in Part I, Item 1A, Risk Factors; of the Company's Form 10-K for the year ended February 28, 2011.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 11, 2011, we entered into a one-year contract with one consultant pursuant to which the consultant is to provide services in connection with our expansion into China. Pursuant to the contracts, we issued 300,000 shares of common stock to the consultant, which were valued at $30,000.   The consultant is not a “U.S. person” as that term is defined in Rule 902(k) of Regulation S under the Securities Act, and the consultant acquired the common stock for investment purposes for his own account and not as a nominee or agent, and not with a view to the resale or distribution thereof, and understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.

ITEM 6. EXHIBITS
 
Exhibit   Description of the Exhibit
31.1   Rule 13a-14(a)/15d-14(a) certification by the chief executive and chief financial officer.
     
32.1   Section 1350 certification by the chief executive officer and chief financial officer.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL     XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Labels Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
 
 
23

 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
XODTEC LED, INC.
 
       
Date:  October 27 , 2011   
 
/s/ Yao-Ting Su
 
   
Yao-Ting Su
 
   
Chief Executive Officer
 
 
24