**Exhibit 99.1**

 

**Independent Auditor’s Report**

 

The Board of Directors and Shareholders

Xurui Guangdian Co., Ltd.:

 

We have audited the balance sheet of Xurui Guangdian Co., Ltd. as of August 31, 2012, and the related statements of operations, equity and comprehensive income (loss), and cash flows for the year then ended. These financial statements are the responsibility of Xurui Guangdian Co., Ltd.’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Xurui Guangdian Co., Ltd. is not required to conduct, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Xurui Guangdian Co., Ltd.’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xurui Guangdian Co., Ltd. as of August 31, 2012, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The financial statements have been prepared assuming that Xurui Guangdian Co., Ltd. will continue as a going concern. As discussed in Note 1 to the financial statements, Xurui Guangdian Co., Ltd. incurred a net loss of RMB 250.9 million during the year ended August 31, 2012 and, as of that date, Xurui Guangdian Co., Ltd.’s accumulated deficit was RMB 248.1 million. As further discussed in Note 13 to the financial statements, Xurui Guangdian Co., Ltd. defaulted on certain bank loans in October 2012. These conditions along with other matters as set forth in Note 13 raise substantial doubt about Xurui Guangdian Co., Ltd.’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

/s/ ShineWing Certified Public Accountants

ShineWing Certified Public Accountants

Beijing, People’s Republic of China

November 20, 2012

 

1

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**Xurui Guangdian Co., Ltd.**

**Balance Sheets**

**As of August 31, 2012 and 2011**

 

**Currency: RMB**

 
| ** **                                             | ** ** | **August 31,   201****2** | ** ** | **(Unaudited)****August 31,   2011** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| **ASSETS**                                             |       |                           |       |                                      |       |
| CURRENT ASSETS:                                        |       |                           |       |                                      |       |
| Cash                                                   |       | 79,625,086                     |       | 58,648,910                                |       |
| Accounts   receivable, net                             |       | 725,229                        |       | 447,985                                   |       |
| Accounts   receivable from related parties             |       | 413,422                        |       | 606,589                                   |       |
| Inventories, net                                       |       | 18,322,731                     |       | 36,531,343                                |       |
| Prepaid expenses   and other current assets            |       | 57,876,838                     |       | 57,214,846                                |       |
| Total current   assets                                 |       | 156,963,306                    |       | 153,449,673                               |       |
| Property, plant   and equipment, net                   |       | 266,735,023                    |       | 398,456,512                               |       |
| Intangible   assets, net                               |       | 3,431,730                      |       | 4,361,817                                 |       |
| TOTAL ASSETS                                           |       | 427,130,059                    |       | 556,268,002                               |       |
| **LIABILITIES   AND EQUITY**                           |       |                           |       |                                      |       |
| CURRENT   LIABILITIES:                                 |       |                           |       |                                      |       |
| Short-term bank   loans                                |       | 50,000,000                     |       | 18,248,517                                |       |
| Accounts payable                                       |       | 37,096,515                     |       | 45,822,510                                |       |
| Accounts payable   to related parties                  |       | 9,692,077                      |       | 5,056,998                                 |       |
| Accrued expenses and other current liabilities         |       | 6,481,173                      |       | 4,045,816                                 |       |
| Deferred income,   current portion                     |       | 20,805,311                     |       | 14,668,182                                |       |
| Total current   liabilities                            |       | 124,075,076                    |       | 87,842,023                                |       |
| Long-term bank   loans, excluding current installments |       | 135,000,000                    |       | 78,000,000                                |       |
| Deferred income,   net of current portion              |       | 108,887,500                    |       | 125,491,879                               |       |
| Total liabilities                                      |       | 367,962,576                    |       | 291,333,902                               |       |
| Commitments and   contingencies (Note 7)          |       |                           |       |                                      |       |
| OWNERS’ EQUITY:                                   |       |                           |       |                                      |       |
| Paid-in capital                                        |       | 204,830,000                    |       | 204,830,000                               |       |
| Additional   paid-in capital                           |       | 102,451,031                    |       | 102,308,700                               |       |
| Accumulated deficit                                    |       | (248,113,548                   | )          | (42,204,600                               | )          |
| Total owners’   equity                            |       | 59,167,483                     |       | 264,934,100                               |       |
| TOTAL LIABILITIES   AND OWNERS’ EQUITY            |       | 427,130,059                    |       | 556,268,002                               |       |

 

See notes to financial statements.

 

2

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**Xurui Guangdian Co., Ltd.**

**Statements of Operations**

**Years ended August 31, 2012 and 2011**

 

**Currency: RMB**

 
| ** **                                | ** ** | **Years Ended August 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **201****2**                              | ** ** | **(Unaudited)****2011** | ** ** |
| Revenues, net                             |       | 5,308,149                                 |       | 2,247,277 |   |
| Cost of revenues                          |       | 69,698,483                                |       | 23,152,224 |   |
| Gross loss                                |       | (64,390,334                               | )          | (20,904,947 | ) |
| Operating   expenses:                     |       |                                      |       |   |   |
| Impairment losses   for long-lived assets |       | 115,199,305                               |       | — |   |
| Research and   development                |       | 5,429,736                                 |       | 11,568,323 |   |
| Selling, general   and administrative     |       | 32,025,421                                |       | 14,582,275 |   |
| Total operating   expenses                |       | 152,654,462                               |       | 26,150,598 |   |
| Loss from operations                      |       | (217,044,796                              | )          | (47,055,545 | ) |
| Other income   (expenses):                |       |                                      |       |   |   |
| Interest income   (expense), net          |       | (11,191,407                               | )          | 298,603 |   |
| Other income, net                         |       | 22,114,820                                |       | 5,605,828 |   |
| Foreign currency   transaction gain, net  |       | 212,435                                   |       | 706,016 |   |
| Total other income,   net                 |       | 11,135,848                                |       | 6,610,447 |   |
| Loss before income taxes                  |       | (205,908,948                              | )          | (40,445,098 | ) |
| Income tax   expense                      |       | —                                    |       | — |   |
| Net loss                                  |       | (205,908,948                              | )          | (40,445,098 | ) |

 

See notes to financial statements.

 

3

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** **

**Xurui Guangdian Co., Ltd.**

**Statements of Equity and Comprehensive Loss**

**Years ended August 31, 2012 and 2011**

 

**Currency: RMB**

 
| ** **                                        | ** ** | **Pain-in capital** | ** ** | **Additional********pain-in capital** | ** ** | **Accumulated Deficit** | ** ** | **Total Equity** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|------------------------------|------------|-----------------------|------------|
| BALANCE—August 31,   2010   (unaudited) |       | 204,830,000              |       | 102,308,700                                |       | (1,759,502                   | )          | 305,379,198           |       |
| Comprehensive loss (unaudited)                    |       | —                   |       | —                                     |       | (40,445,098                  | )          | (40,445,098           | )          |
| BALANCE—August 31,   2011   (unaudited) |       | 204,830,000              |       | 102,308,700                                |       | (42,204,600                  | )          | 264,934,100           |       |
| Stock-based   compensation                        |       | —                   |       | 142,331                                    |       | —                       |       | 142,331               |       |
| Comprehensive loss                                |       | —                   |       | —                                     |       | (205,908,948                 | )          | (205,908,948          | )          |
| BALANCE—August 31,   2012               |       | 204,830,000              |       | 102,451,031                                |       | (248,113,548                 | )          | 59,167,483            |       |

 

See notes to financial statements.

 

4

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**Xurui Guangdian Co., Ltd.**

**Statements of Cash Flows**

**Years ended August 31, 2012 and 2011**

 

**Currency: RMB**

 
| ** **                                                                                  | ** ** | **Years Ended August 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **201****2**                              | ** ** | **(Unaudited)****2011** | ** ** |
| CASH FLOWS FROM   OPERATING ACTIVITIES:                                                     |       |                                      |       |   |   |
| Net loss                                                                                    |       | (205,908,948                              | )          | (40,445,098 | ) |
| Adjustments to   reconcile net loss to net cash provided by (used in) operating activities: |       |                                      |       |   |   |
| Depreciation and   amortization                                                             |       | 42,900,639                                |       | 13,373,667 |   |
| Government grant   realized                                                                 |       | (23,383,497                               | )          | (5,739,939 | ) |
| Stock-based   compensation expense                                                          |       | 142,331                                   |       | — |   |
| Provisions for   inventory write-downs                                                      |       | 35,357,761                                |       | 13,695,695 |   |
| Impairment losses   for long-lived assets                                                   |       | 115,199,305                               |       | — |   |
| Loss on disposal   of property, plant and equipment                                         |       | 1,132,497                                 |       | — |   |
| Changes in   operating assets and liabilities:                                              |       |                                      |       |   |   |
| Accounts   receivable, net                                                                  |       | (84,077                                   | )          | (1,054,574 | ) |
| Inventories                                                                                 |       | (17,149,149                               | )          | (50,227,038 | ) |
| Prepaid expenses   and other                                                                |       | (661,992                                  | )          | (56,443,659 | ) |
| Accounts payable                                                                            |       | (3,554,647                                | )          | 15,436,261 |   |
| Accrued expenses and other current liabilities                                              |       | 1,356,962                                 |       | 3,354,299 |   |
| Deferred   income-government grant                                                          |       | 12,916,247                                |       | 145,900,000 |   |
| Net cash provided   by (used in) operating activities                                       |       | (41,736,568                               | )          | 37,849,614 |   |
| CASH FLOWS FROM   INVESTING ACTIVITIES:                                                     |       |                                      |       |   |   |
| Purchase of   property, plant and equipment, including interest capitalized                 |       | (25,755,497                               | )          | (308,892,720 | ) |
| Payments for   development of intangible assets                                             |       | (283,242                                  | )          | (4,558,578 | ) |
| Net cash used in   investing activities                                                     |       | (26,038,739                               | )          | (313,451,298 | ) |
| CASH FLOWS FROM   FINANCING ACTIVITIES:                                                     |       |                                      |       |   |   |
| Proceeds from   short-term bank loans                                                       |       | 51,747,101                                |       | 18,248,517 |   |
| Payments on   short-term bank loans                                                         |       | (19,995,618                               | )          | — |   |
| Proceeds from   long-term bank loans                                                        |       | 57,000,000                                |       | 78,000,000 |   |
| Net cash provided   by financing activities                                                 |       | 88,751,483                                |       | 96,248,517 |   |
| NET INCREASE   (DECREASE) IN CASH                                                           |       | 20,976,176                                |       | (179,353,167 | ) |
| CASH—Beginning of   year                                                               |       | 58,648,910                                |       | 238,002,077 |   |
| CASH—End of year                                                                       |       | 79,625,086                                |       | 58,648,910 |   |
| SUPPLEMENTAL   DISCLOSURES OF CASH FLOW INFORMATION:                                        |       |                                      |       |   |   |
| Cash paid for   interest, net of amounts capitalized                                        |       | 10,356,380                                |       | 297,613 |   |
| Cash paid for   income taxes                                                                |       | —                                    |       | — |   |
| NONCASH INVESTING   AND FINANCING ACTIVITIES:                                               |       |                                      |       |   |   |
| Accrual related   to property, plant and equipment                                          |       | 34,464,948                                |       | 35,001,217 |   |

 

See notes to financial statements.

 

5

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**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements**

**Years Ended August 31, 2012 and 2011****(Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**1.  Company’s Background**

 

**Background**— Xurui Guangdian Co., Ltd. (“Xurui Guangdian” or the “Company”) was established in Foshan, Guangdong Province, P.R.China on January 13, 2010 as a Sino-foreign joint venture enterprise. Xurui Guangdian develops, manufactures and sells LED chips. The Company’s customers are based mainly in China Mainland.

 

As of August 31, 2012, the Company’s registered capital, which was fully paid, amounted to RMB 204,830,000. The Company has six investors, namely SemiLEDs Corporation (“SemiLEDs”), Foshan Nationstar Optoelectronics Co., Ltd. (“Nationstar”), Zhejiang Shenghui Lighting Co., Ltd., Beijing Aieryidi Investment Co., Ltd, Lampower Photoelectric Co., Ltd, and Foshan Nanhai High-tech Industry Investment Co., Ltd., who owned 49%, 15%, 13%, 11%, 7%, 5% of the common shares in Xurui Guangdian as of August 31, 2012, respectively. Except for SemiLEDs, a Delaware corporation listed on the NASDAQ Global Select Market, the other investors are registered in P.R.China.

 

**Going Concern**— The accompany financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses since its inception, including net losses of RMB 205.9 million and RMB 40.4 million during the years ended August 31, 2012 and 2011, respectively, had an accumulated deficit of RMB 248.1 million as of August 31, 2012, and in October 2012 defaulted on certain bank loans (see Note 13). These conditions along with other matters described in Note 13 raise substantial doubt about the Company’s ability to continue as a going concern. As further described in Note 3, management believes it will be able to identify sufficient cash flows to fund operations for the next 12 months. Sources of this anticipated cash flow include the issuance of new common shares to existing or new investors and short-term loans from shareholders, among others. The Company may also need to consider alternative financing sources, which may not be available when and if needed by the Company or on favorable terms.

 

**2.  Summary of Significant Accounting Policies**

 

**Basis of Presentation**— The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

**Use of Estimates —**The preparation of financial statements in conformity with U.S. GAAP 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 revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the collectibility of accounts receivable, inventory net realizable values, valuation of stock-based compensation expense, the useful lives of property, plant and equipment and intangible assets, and the recoverability of the carrying amounts of property, plant and equipment and intangible assets. Management bases its estimates on historical experience and also on assumptions that it believes are reasonable. Management assesses these estimates on a regular basis; however, actual results could differ materially from those estimates.

 

**Certain Significant Risks and Uncertainties**— The Company is subject to certain risks and uncertainties that could have a material and adverse effect on the Company’s future financial position****or results of operations, which risks and uncertainties include, among others: inability of the Company to raise additional funds, inability of the Company to avoid bank seizure of the assets securing its loans and inability to attract new management to otherwise restructure its operations.  See Notes 1, 3 and 13.

 

6

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**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011****(Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**Concentration of Supply Risk —**Some of the components and technologies used in the Company’s products are purchased and licensed from a limited number of sources. The loss of any of these suppliers may cause the Company to incur transition costs to another supplier, result in delays in the manufacturing and delivery of the Company’s products, or cause it to carry excess or obsolete inventory. The Company relies on a limited number of such suppliers for the fulfillment of its customer orders. Any failure of such suppliers to perform could have an adverse effect upon the Company’s reputation and its ability to distribute its products or satisfy customers’ orders, which could adversely affect the Company’s business, financial position, results of operations and cash flows.

 

**Concentration of Credit Risk —**Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.

 

The Company keeps its cash in demand deposits. As ofAugust 31, 2012 and 2011, cash of the Company consisted of the following:

 
| **Cash**                      | ** ** | **August 31,   201****2** | ** ** | **(Unaudited)********August 31,   2011** | ** ** |
|-------------------------------|------------|---------------------------|------------|------------------------------------------|------------|
| China:                        |       |                      |       |                                     |       |
| Denominated in   RMB          |       | 79,384,268                |       | 58,311,053                               |       |
| Denominated in   U.S. dollars |       | 240,818                   |       | 337,857                                  |       |
| Total cash                    |       | 79,625,086                |       | 58,648,910                               |       |

 

The Company’s revenues are substantially derived from the sales of LED chips. A significant portion of the Company’s revenues are derived from a limited number of customers and sales are concentrated in China Mainland. Management performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. Management evaluates the need to establish an allowance for doubtful accounts for estimated potential credit losses at each reporting period. The allowance for doubtful accounts is based on the management’s assessment of the collectibility of its customer accounts. Management regularly reviews the allowance by considering certain factors such as historical experience, industry data, credit quality, age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.

 

**Cash and Cash Equivalents**— The Company considers all highly liquid investment instruments purchased with initial maturities of three months or less to be cash equivalents. As of August 31, 2012 and 2011, there was no cash equivalents held.

 

**Foreign Currency**— The Company uses RMB as its functional currency. Except for paid-in capital, foreign currency transactions are translated into RMB at the exchange rates stipulated by People’s Bank of China (the “stipulated exchange rates”) at transaction date. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated into RMB at the stipulated exchange rates at the balance sheet date. Exchange differences arising from these translations are recognized as exchange gain or loss in the statements of operations.

 

**Inventories**— Inventories primarily consist of raw materials, work in process and finished goods and are stated at the lower of cost or market value. Cost is determined using a weighted average. For work in process and manufactured inventories, cost consists of raw materials, direct labor and an allocated portion of the Company’s production overhead. The Company also writes down excess and obsolete inventory to its estimated market value based upon estimations about future demand and market conditions as conditions warrant. Provisions for inventory write-downs are included in cost of revenues in the statements of operations. Once written down, inventories are carried at this lower cost basis until sold, used, or scrapped.

 

**Property, Plant and Equipment**— Property, plant and equipment are stated at cost less accumulated depreciation, amortization and impairment. Depreciation on property, plant and equipment is calculated using the straight-line method over the estimated useful lives, less estimated salvage values of the assets.

 

The estimated useful lives of property, plant and equipment are as follows:

 
| Land use right             |   | 50 years      |   |
|----------------------------|--------|---------------|--------|
| Buildings and improvements |   | 20 years      |   |
| Machinery and equipment    |   | 5 to 10 years |   |
| Other equipment            |   | 3 to 5 years  |   |

 

7

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**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011****(Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**Major Maintenance Activities**— The Company incurs maintenance costs on its major equipment. Repair and maintenance costs are expensed as incurred.

 

**Intangible Assets**— Intangible assets consist of patentsand computer software. Intangible assets are initially recognized at their respective acquisition costs. All of the Company’s intangible assets have been determined to have finite useful lives and are, therefore, amortized using the straight-line method over their estimated useful lives:

 
| Patents           |   | 10 years |   |
|-------------------|--------|----------|--------|
| Computer software |   | 3 years  |   |

 

**Impairment of Long-Lived Assets —**Management evaluates the Company’s long-lived assets, excluding goodwill, that consist of property, plant and equipment and intangible assets, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment loss is measured based on the excess carrying value of the asset over the estimated fair value of the asset. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisers, as considered necessary and appropriate under circumstances.

 

**Income Taxes**—Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the asset and liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are generally recognized for all deductible temporary differences and loss carry-forward to the extent that it is probable that taxable profits will be available against which those deductible temporary differences and loss carry-forward can be utilized.

 

Deferred tax assets and liabilities are measured using enacted tax rates expected to be applicable to the taxable income in the years in which those temporary differences and loss carry-forward are expected to be recovered, settled, or utilized. The effect of a change in tax rates on the Company’s deferred tax assets and liabilities is recognized in the statements of operations in the period the change in the tax law was enacted.

 

**Government Grant**— Government grants are not recognized until there is a reasonable assurance that the Company will comply with the conditions attached to them and the grants will be received.

 

Government grants whose primary condition is that the Company should purchase, construct or otherwise acquire non-current assets are recognized as deferred income in the balance sheet and transferred to profit or loss on a systematic and rational basis over the estimated useful lives of the related assets.

 

Other government grants are recognized as income over the periods necessary to match them with the costs for which they are intended to compensate, on a systematic basis. Government grants that are receivable as compensation for the expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future related costs are recognized in profit or loss in the period in which they become receivable.

 

**Stock-based Compensation**— Compensation costs related to employee stock optionsare based on the fair value of the options on the date of grant, net of estimated forfeitures. The Company determines the grant date fair value of the options using the Black-Scholes option-pricing model. The related stock-based compensation expense is generally recognized on a straight-line basis over the period in which an employee is required to provide service in exchange for the options, or the vesting period of the respective options.

 

**Research and Development Costs**— Research and development costsare expensed as incurred. Research and development costs are presented as a separate line item in the statements of operations.

 

**Revenue Recognition**— The Company recognizes revenue on sales of its products when persuasive evidence of an arrangement exists, the price is fixed or determinable, ownership and risk of loss has transferred and collection of the sales proceeds is probable. The Company obtains written purchase authorizations from its customers as evidence of an arrangement and these authorizations generally provide for a specified amount of product at a fixed price. Generally, the Company considers delivery to have occurred at the time of shipment as this is generally when title and risk of loss for the products will pass to the customer.

 

8

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**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011****(Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**Accounts Receivable**— Accounts receivable are recorded at invoiced amounts, net of allowances for doubtful accounts, and do not bear interest. The allowance for doubtful accounts is based on the management’s assessment of the collectability of its customer accounts. Management regularly reviews the allowance by considering certain factors such as historical experience, industry data, credit quality, age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. Charges to bad debt expense were zero during both the years ended August 31, 2012 and 2011.

 

**Commitments and Contingencies**— Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recognized when it is probable that a liability has been incurred and the amount can be reasonably estimated.

 

**Fair Value Measurements**— The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

 

·                          Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

·                          Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

·                          Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

See Note 12 for further details.

 

**Recently Issued Accounting Standards Update**

 

**Presentation of comprehensive income**— In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 increases the prominence of other comprehensive income in the financial statements. Under ASU 2011-05, the Company will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. ASU 2011-05 eliminates the option to present other comprehensive income in the statement of changes in equity. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. When ASU 2011-05 is adopted, the Company will be required to apply ASU 2011-05 retrospectively. The Company has elected not to early adopt ASU 2011-05 and has not yet decided whether to present the components of net income and comprehensive income in one single financial statement or two consecutive financial statements when ASU 2011-05 is adopted. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which defers the effective date to present separate line items on the statement of operations for reclassification adjustments of items out of accumulated other comprehensive income into net income. The deferral of the presentation requirements does not impact the effective date of other requirements in ASU 2011-05.

 

9

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**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011****(Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**3.  Management’s Future Plans**

 

Due to the negative impact caused by economic and industry downturn in recent years, the Company has incurred net losses since its inception and has an accumulated deficit. The Company incurred a net loss of RMB 205.9 million during the year ended August 31, 2012 and, as of that date, the Company’s accumulated deficit was RMB 248.1 million. The Company has formulated a restructuring plan that contemplates the following actions designed to improve the Company’s operating performance and financial condition:

 

·                  Raise additional funds by issuing new common shares to improve liquidity to support the Company’s operations and to strengthen its financial position.

 

·                  Recruit a new management team to be comprised of technical and management professionals who would be charged with improving the Company’s profitability and operating performance.

 

The Company believes that the implementation of these actions would improve its operations and financial position in the future.

 

See also Note 13.

 

**4.  Balance Sheet Components**

 

**Inventories**

 

Inventories as of August 31, 2012 and 2011 consisted of the following:

 
| ** **      | ** ** | **August 31,   201****2** | ** ** | **(Unaudited)****August 31,   2011** | ** ** |
|-----------------|------------|---------------------------|------------|--------------------------------------|------------|
| Raw materials   |       | 11,894,673                |       | 19,944,270                           |       |
| Work in process |       | 909,927                   |       | 4,791,370                            |       |
| Finished goods  |       | 5,518,131                 |       | 11,795,703                           |       |
| Total           |       | 18,322,731                |       | 36,531,343                           |       |

 

Inventory write-downs to estimated net realizable values for the years ended August 31, 2012 and 2011 were RMB 35.4 million and RMB 13.7 million (unaudited), respectively.

 

**Property, Plant and Equipment**

 

Property, plant and equipment as of August 31, 2012 and 2011 consisted of the following:

 
| ** **                            | ** **                                  | **August 31,   201****2** | ** **   | **(Unaudited)****August 31,   2011** | ** **  |
|---------------------------------------|---------------------------------------------|---------------------------|--------------|--------------------------------------|-------------|
| Land use right                        |                                        | 22,917,497                |         | 22,917,497                           |        |
| Buildings and   improvements          |                                        | 92,883,101                |         | 89,742,317                           |        |
| Machinery and   equipment             |                                        | 295,475,533               |         | 204,351,751                          |        |
| Other equipment                       |                                        | 9,334,854                 |         | 7,593,531                            |        |
| Construction in   progress            |                                        | 16,198,116                |         | 87,726,404                           |        |
| Total property,   plant and equipment |                                        | 436,809,101               |         | 412,331,500                          |        |
| Less:                                 | Accumulated   depreciation and amortization |                      | (55,426,366  | )                                    | (13,874,988 | ) |
|                                  | Impairment losses                           |                      | (114,647,712 | )                                    | —      |   |
| Property, plant   and equipment, net  |                                        | 266,735,023               |         | 398,456,512                          |        |

 

10

----

 

**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011****(Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

Land use right and buildings were deemed to have been pledged as collateral for the Company’s long-term bank loans as of August 31, 2012 and 2011 (unaudited) subject to the completion of required formalities. See Note 13 for further details.

 

In the fourth quarter of fiscal 2012, the Company carried out a review of the recovery of the carrying values of its property, plant and equipment. The review led to the recognition of an impairment loss of RMB 114.6 million on certain of its property, plant and equipment, that has been recognized in profit or loss during the year ended August 31, 2012, due to economic downturn as well as a less competitive position the Company has taken. The fair value of the relevant assets has been determined on the basis of the present value of estimated expected future cash flows for its long-lived assets and third-party independent appraisals. The discount rate used in measuring the present value of estimated expected future cash flows was 15%. No impairment loss was recognized during the year ended August 31, 2011 (unaudited).

 

**Intangible Assets**

 

Intangible assets as of August 31, 2012 and 2011 consisted of the following:

 
| ** **        | ** ** | **August 31, 201****2**                                | ** ** |
|-------------------|------------|--------------------------------------------------------|------------|
| ** **        | ** ** | **Weighted   Average   Amortization   Period (Years)** | ** ** | **Gross   Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Impairment********Losses** | ** ** | **Net   Carrying   Amount** | ** ** |
| Patents           |       | 10                                                     |       | 3,959,689 |   | (527,959 | ) | — |   | 3,431,730 |   |
| Computer software |       | 3                                                      |       | 882,131 |   | (330,538 | ) | (551,593 | ) | — |   |
| Total             |       |                                                   |       | 4,841,820 |   | (858,497 | ) | (551,593 | ) | 3,431,730 |   |

 
| ** **        | ** ** | **(Unaudited)********August 31, 2011**                 | ** ** |
|-------------------|------------|--------------------------------------------------------|------------|
| ** **        | ** ** | **Weighted   Average   Amortization   Period (Years)** | ** ** | **Gross   Carrying   Amount** | ** ** | **Accumulated********Amortization** | ** ** | **Impairment********Losses** | ** ** | **Net   Carrying   Amount** | ** ** |
| Patents           |       | 10                                                     |       | 3,959,689 |   | (131,990 | ) | — |   | 3,827,699 |   |
| Computer software |       | 3                                                      |       | 598,889 |   | (64,771 | ) | — |   | 534,118 |   |
| Total             |       |                                                   |       | 4,558,578 |   | (196,761 | ) | — |   | 4,361,817 |   |

 

Amortization expenses recognized for the years ended August 31, 2012 and 2011 were RMB 0.7 million and RMB 0.2 million (unaudited), respectively.

 

In the fourth quarter of fiscal 2012, the Company also performed a review of the recovery of the carrying value of its intangible assets. The review led to the recognition of an impairment loss of RMB 0.6 million, that has been recognized in profit or loss. The fair value of the intangible assets has been determined on the basis of the present value of estimated expected future cash flows for its long-lived assets. No impairment loss was recognized during the year ended August 31, 2011 (unaudited).

 

The estimated future amortization expense for the Company’s intangible assets as of August 31, 2012 was as follows:

 
| **Years   Ending August 31,** | ** ** | **Total** | ** ** |
|-------------------------------|------------|-----------|------------|
| 2013                          |       | 395,969   |       |
| 2014                          |       | 395,969   |       |
| 2015                          |       | 395,969   |       |
| 2016                          |       | 395,969   |       |
| 2017                          |       | 395,969   |       |
| Thereafter                    |       | 1,451,885 |       |
| Total                         |       | 3,431,730 |       |

 

11

----

 

**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011****(Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**Accrued****Expenses and Other Current****Liabilities**

 

Accrued expenses and other current liabilities as of August 31, 2012 and 2011 consisted of the following:

 
| ** **                          | ** ** | **August 31,   201****2** | ** ** | **(Unaudited)****August 31,   2011** | ** ** |
|-------------------------------------|------------|---------------------------|------------|--------------------------------------|------------|
| Accrued   compensation and benefits |       | 872,920                   |       | 1,551,741                            |       |
| Accrued interest   payable          |       | 2,647,261                 |       | 1,116,216                            |       |
| Private loans                       |       | 1,200,000                 |       | —                               |       |
| Other liabilities                   |       | 1,760,992                 |       | 1,377,859                            |       |
| Total                               |       | 6,481,173                 |       | 4,045,816                            |       |

 

**5.  Deferred Income**

 

In July 2010 and October 2010, the Company received government grants of RMB 11.0 million and RMB 12.0 million (unaudited), respectively, as subsidies for the acquisition of land use right and construction of manufacturing facilities. The government grants were initially deferred and are realized and recognized in other income over the estimated useful life of the landuse right and buildings. For the years ended August 31, 2012 and 2011, the Company recognized RMB 1.2 million and RMB 0.5 million (unaudited), respectively, in other income.

 

In July 2010, April 2011 and August 2011, the Company received government grants of RMB 77.0 million, RMB 21.0 million and RMB 12.0 million, respectively, as subsidies for the acquisition of 11 sets of MOCVD equipment. The government grants were initially deferred and are realized and recognized in other income over the estimated useful life of the MOCVD equipment. For the years ended August 31, 2012 and 2011, the Company recognized RMB 8.1 million and RMB 2.3 million (unaudited), respectively, in other income.

 

From December 2010 to November 2011, the Company received a government grant that totaled RMB 16.3 million as a subsidy for the support of various research and development projects. The government grant was initially deferred and is realized and recognized in other income in the same period when qualifying expenditures are made. For the years ended August 31, 2012 and 2011, the Company recognized RMB 6.8 million and RMB 3.0 million (unaudited), respectively, in other income.

 

From January 2012 to August 2012, the Company received a government grant that totaled RMB 9.5 million as a subsidy for payments on interest expense of bank loans. The total income of RMB 9.5 million was initially deferred and is realized and recognized in other income in the same period as the relevant expense. For the year ended August 31, 2012, the Company recognized RMB 7.3 million in other income.

 

**6.  Indebtedness**

 

**Short-term bank loans**

 

During the years ended August 31, 2012 and 2011, the Company utilized short-term lines of credit with certain banks to fulfill its short-term financing needs. Total outstanding balances of the lines of credit wereRMB 50,000,000 and RMB 18,248,517 (unaudited) as of August 31, 2012 and 2011, respectively. These lines of credit had maturity dates of three to twelve months from the date of draw down, and bore fixed or floating interest rates ranging from 3.752% to 7.872% per annum as of August 31, 2012 and 2011, respectively. Unused lines of credit were RMB 135.0 million and RMB 281.8 million (unaudited) as of August 31, 2012 and 2011, respectively.

 

12

----

 

**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011 (Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**Long-term bank loans**

 

Long-term bank loans as of August 31, 2012 and 2011 consisted of the following loans with a Shanghai Pudong Development Bank (“SPD Bank”):

 
| ** **                                                                                      | ** ** | **August 31,   201****2** | ** ** | **(Unaudited)****August 31,   2011** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| Secured loan due   on May 16, 2016, with interest rate of 7.98% in fiscal 2012 and 2011    |       | 30,000,000                     |       | 30,000,000                                |       |
| Secured loan due   on June 20, 2016, with interest rate of 7.98% in fiscal 2012 and 2011   |       | 23,000,000                     |       | 23,000,000                                |       |
| Secured loan due   on December 11, 2016, with interest rate of 8.28% in fiscal 2012        |       | 10,000,000                     |       | —                                    |       |
| Secured loan due   on June 27, 2017, with interest rate of 7.98% in fiscal 2012            |       | 47,000,000                     |       | —                                    |       |
| Secured loan due   on August 14, 2016, with interest rate of 7.98% in fiscal 2012 and 2011 |       | 25,000,000                     |       | 25,000,000                                |       |
| Total long-term   bank loans                                                                    |       | 135,000,000                    |       | 78,000,000                                |       |
| Less: Current   installments                                                                    |       | —                         |       | —                                    |       |
| Total long-term   bank loans, excluding current installments                                    |       | 135,000,000                    |       | 78,000,000                                |       |

 

These long-term bank loans are secured by the Company’s land use right and buildings. These long-term bank loans do not contain financial covenants; however, these loans are subject to acceleration upon the occurrence of an event of default, which includes, among others, failure to pay other indebtedness. See Notes 4 and 13 for further details.

 

No interest was capitalized during the years ended August 31, 2012 and 2011 (unaudited).

 

The scheduled principal payments for the Company’s long-term bank loans as of August 31, 2012 consist of the following:

 
| **Years Ending August 31,** | ** ** | **Scheduled   Principal********Payments** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| 2013                                       |       | —                                    |       |
| 2014                                       |       | —                                    |       |
| 2015                                       |       | —                                    |       |
| 2016                                       |       | 78,000,000                                |       |
| 2017                                       |       | 57,000,000                                |       |
| Thereafter                                 |       | —                                    |       |
| Total                                      |       | 135,000,000                               |       |

 

**7.  Commitments and Contingencies**

 

**Operating Lease Agreement**—The Company has an operating lease with an unrelated party for industrial gas equipment, which is non-cancellable and is due to expire in June 2016. Lease expense related to the non-cancellable operating lease was RMB 560,000 during the year ended August 31, 2012. The aggregate future non-cancellable minimum rental payments for the Company’s operating lease as of August 31, 2012 consisted of the following:

 
| **Years Ending August 31,** | ** ** | **Operating********Leases** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| 2013                                       |       | 1,184,000                   |       |
| 2014                                       |       | 1,281,680                   |       |
| 2015                                       |       | 1,322,520                   |       |
| 2016                                       |       | 1,102,100                   |       |
| 2017                                       |       | —                      |       |
| Thereafter                                 |       | —                      |       |
| Total                                      |       | 4,890,300                   |       |

 

**Purchase Obligations**—The Company had purchase commitments for property, plant and equipment in the amount of RMB 1.0 million and RMB 47.8 million (unaudited) as of August 31, 2012 and 2011, respectively.

 

13

----

 

**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011 (Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**8****. ****Capital Contribution**

 

The shareholders’ ownership interests as of August 31, 2012 were as follows:

 
| **Shareholders**                                             | ** ** | **Paid-in Capital** | ** ** | **Additional   paid-in   Capital** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|------------------------------------|------------|----------------|------------|
| SemiLEDs                                                     |       | 100,370,000              |       | —                             |       | 49             | %          |
| Nationstar                                                   |       | 30,725,000               |       | 34,104,750                         |       | 15             | %          |
| Zhejiang Shenghui   Lighting Co., Ltd.                  |       | 26,625,000               |       | 29,553,750                         |       | 13             | %          |
| Beijing Aieryidi   Investment Co., Ltd.                 |       | 22,530,000               |       | 11,366,400                         |       | 11             | %          |
| Lampower   Photoelectric Co., Ltd.                      |       | 14,340,000               |       | 15,917,400                         |       | 7              | %          |
| Foshan Nanhai   High-tech Industry Investment Co., Ltd. |       | 10,240,000               |       | 11,366,400                         |       | 5              | %          |
| Stock-based   compensation for employees                     |       | —                   |       | 142,331                            |       | —         |       |
| **Total**                                                    |       | 204,830,000              |       | 102,451,031                        |       | 100            | %          |

 

**9.  Income Taxes**

 

The statutory enterprise income tax rate in China is 25%.

 

Income tax expense differed from the amounts computed by applying the statutory enterprise income tax rate in China of 25% to pretax loss for the years ended August 31, 2012 and 2011 as a result of the following:

 
| ** **                                         | ** ** | **Year ended ****August 31, 2012** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                         | ** ** | **201****2**                                           | ** ** | **(Unaudited)****2011** | ** ** |
| Computed   “expected” income tax benefit |       | (51,477,237                                            | )          | (10,111,275 | ) |
| Valuation   allowance and other                    |       | 51,477,237                                             |       | 10,111,275 |   |
| Income tax   expense                               |       | —                                                 |       | — |   |

 

Net deferred tax assets as of August 31, 2012 and 2011 consisted of the following:

 
| ** **                                                                                    | ** ** | **August 31,   201****2** | ** ** | **(Unaudited)****August 31,   2011** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| Deferred tax   assets:                                                                        |       |                           |       |                                      |       |
| Inventories, primarily due to inventory obsolescence and lower of cost   or market provisions |       | 10,903,729                     |       | 3,423,924                                 |       |
| Property, plant and equipment, due to lower of carrying amount or fair   value                |       | 28,661,928                     |       | —                                    |       |
| Intangible assets, due to lower of carrying amount or fair value                              |       | 137,898                        |       | —                                    |       |
| Stock-based compensation                                                                      |       | 35,583                         |       | —                                    |       |
| Net operating loss carryforwards                                                              |       | 22,286,757                     |       | 7,124,856                                 |       |
| Total gross   deferred tax assets                                                             |       | 62,025,895                     |       | 10,548,780                                |       |
| Less: Valuation   allowance                                                                   |       | (62,025,895                    | )          | (10,548,780                               | )          |
| Net deferred tax   assets                                                                     |       | —                         |       | —                                    |       |

 

A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax loss carry-forwards utilizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company established full valuation allowances which offset the net deferred tax assets as of both August 31, 2012 and 2011 due to the uncertainty of realizing future tax benefits from its net operating loss carry-forwards and other deferred tax assets.

 

As of August 31, 2012, the Company had net operating loss carry-forwards of RMB 89,147,028, expiring beginning in 2015.

 

As of August 31, 2012 and 2011, the Company determined that it had no uncertain tax positions.

 

14

----

 

**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011 (Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**10.  Related-Party Transactions**

 

The following material related-party transactions were reported in the Company’s statements of operations during the years ended August 31, 2012and 2011 (in thousand):

 
| ** **                | ** ** | ** **               | ** ** | **Years Ended August 31** | ** ** |
|---------------------------|------------|--------------------------|------------|------------------------------------------|------------|
| **Related Parties**  | ** ** | **Transactions**         | ** ** | **201****2**                             | ** ** | **(Unaudited)****2011** | ** ** |
| SemiLEDs and subsidiaries |       | Purchases of goods(1)    |       | 2,213                                    |       | 3,906 |   |
| SemiLEDs and subsidiaries |       | Sales of goods(2)        |       | 324                                      |       | — |   |
| SemiLEDs and subsidiaries |       | Receiving of services(3) |       | 257                                      |       | 1,970 |   |
| Nationstar                |       | Sales of goods(2)        |       | —                                   |       | 1,500 |   |

 

----

(1)   The Company purchased products from related parties pursuant to standard sale orders.

 

(2)   The Company sold products to related parties pursuant to standard purchase orders.

 

(3)   Service fees were negotiated on an arm’s length basis.

 

In fiscal 2012, the Company purchased equipment from SemiLEDs’ subsidiary for total consideration of USD 243,540.

 

Amounts receivable from and payable to related parties for transactions described above as of August 31, 2012and 2011 were as follows:

 
| ** **                                | ** ** | **August 31, 201****2** | ** ** | **(Unaudited)****August 31, 2011** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------|------------|
| Accounts receivable from related parties: |       |                              |       |                                         |       |
| SemiLEDs and subsidiaries                 |       | 413,422                           |       | 29,400                                       |       |
| Nationstar                                |       | —                            |       | 1,500                                        |       |
| Zhejiang Shenghui Lighting Co., Ltd. |       | —                            |       | 575,689                                      |       |
| Total                                     |       | 413,422                           |       | 606,589                                      |       |
|                                      |       |                              |       |                                         |       |
| Accounts payable   to related parties:    |       |                              |       |                                         |       |
| SemiLEDs and subsidiaries                 |       | 9,692,077                         |       | 5,056,998                                    |       |

 

15

----

 

**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011 (Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

**11.  Product and Geographic Information**

 

Revenues by products for the years ended August 31, 2012and 2011 were as follows:

 
| ** **        | ** ** | **Years Ended August 31,** | ** ** |
|-------------------|------------|-------------------------------------------|------------|
| ** **        | ** ** | **201****2**                              | ** ** | **(Unaudited)****2011** | ** ** |
| LED chips         |       | 3,103,755                                 |       | 1,977,290 |   |
| LED components    |       | 949                                       |       | 590 |   |
| Lighting products |       | 191,880                                   |       | 269,397 |   |
| Others            |       | 2,011,565                                 |       | — |   |
| Total             |       | 5,308,149                                 |       | 2,247,277 |   |

 

Others include primarily revenues attributable to the sale of scraps of gold.

 

Revenues by geography are based on the billing address of the customer. The following table sets forth revenue by geographic area for the years ended August 31, 2012 and 2011:

 
| ** **     | ** ** | **Years Ended August 31,** | ** ** |
|----------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **201****2**                              | ** ** | **(Unaudited)****2011** | ** ** |
| China Mainland |       | 5,308,149                                 |       | 1,963,203 |   |
| Hong Kong      |       | —                                    |       | 284,074 |   |
| Total          |       | 5,308,149                                 |       | 2,247,277 |   |

 

**Long-Lived Assets**

 

All of the Company’s long-lived assets are located in P.R.China.

 

**12.  Fair Value Measurements**

 

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at August 31, 2012 and 2011. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 
| ** **                                                | ** ** | **August 31, 201****2** | ** ** | **(Unaudited)********August 31, 2011** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **Carrying   Amount**             | ** ** | **Fair   Value**                                 | ** ** | **Carrying   Amount** | ** ** | **Fair   Value** | ** ** |
| Financial assets:                                         |       |                              |       |                                             |       |   |   |   |   |
| Cash                                                      |       | 79,625,086                        |       | 79,625,086                                       |       | 58,648,910 |   | 58,648,910 |   |
| Receivables (including related parties)                   |       | 1,138,651                         |       | 1,138,651                                        |       | 1,054,574 |   | 1,054,574 |   |
| Other assets   (non-derivatives)                          |       | 56,738,474                        |       | 56,738,474                                       |       | 51,469,409 |   | 51,469,409 |   |
| Financial   liabilities:                                  |       |                              |       |                                             |       |   |   |   |   |
| Short-term bank   loans                                   |       | 50,000,000                        |       | 50,000,000                                       |       | 18,248,517 |   | 18,248,517 |   |
| Payables (including related parties)                      |       | 46,788,592                        |       | 46,788,592                                       |       | 50,879,508 |   | 50,879,508 |   |
| Long-term bank   loans   (including current installments) |       | 135,000,000                       |       | 135,000,000                                      |       | 78,000,000 |   | 78,000,000 |   |

 

The fair values of the financial instruments shown in the above table as of August 31, 2012 and 2011 represent the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects management’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by management based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, available observable and unobservable inputs.

 

16

----

 

**Xurui Guangdian Co., Ltd.**

**Notes to Financial Statements (Continued)**

**Years Ended August 31, 2012 and 2011 (Unaudited)**

**(Expressed in RMB unless otherwise stated)**

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

·              Cash, receivables and payables (including related parties), and short-term bank loans: The carrying amounts, at face value or cost plus accrued interest, approximate fair value because of the short maturity of these instruments.

 

·              Other assets (non-derivatives) include value-added tax (“VAT”) deductible and refundable deposits. The fair values of VAT deductible and refundable deposits are based on the carrying amount.

 

·              Long-term bank loans: The fair value of the Company’s long-term bank loans is estimated based on the prevailing market rate adjusted by the Company’s credit spread.

 

The following table presents fair value measurements of assets and liabilities that were measured at fair value on a nonrecurring basis as of August 31, 2012:

 
| ** **                    | ** ** | **August**** 31,   201****2** | ** ** | **Quoted****prices in   active   markets for   identical   assets   (Level 1)** | ** ** | **Significant   other   observable   inputs   (Level 2)** | ** ** | **Significant   unobservable   inputs   (Level 3)** | ** ** | **Total   losses** | ** ** |
|-------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------|------------|
| Property, plant and equipment |       | 309,675,116                        |       | —                                                                                         |       | —                                                         |       | 309,675,116                                              |       | 114,647,712        |       |
| Intangible assets             |       | 3,431,730                          |       | —                                                                                         |       | —                                                         |       | 3,431,730                                                |       | 551,593            |       |

 

The Company’s financial statements as of and for the year ended August 31, 2011 did not include any nonrecurring fair value measurements relating to assets or liabilities (unaudited).

 

**13.  Subsequent Events**

 

In September 2012, the required formalities associated with the pledging of the Company’s land use right and buildings as collateral to secure the long-term bank loans totaling RMB 135.0 million from SPD Bank were completed.

 

In October 2012, the Company defaulted on an unsecured short-term bank loan of RMB 15.0 million due to the Agricultural Bank of China. The Agricultural Bank of China has made a demand for payment and recently obtained a court order to seize certain of the Company’s assets. Such default caused SPD Bank in November 2012 to accelerate the maturity of SPD Bank’s long-term secured bank loans to the Company and to demand payment of the outstanding balances of RMB 135.0 million. The assets pledged as collateral, including the land use right and buildings, and/or other assets may be seized by the banks. SPD Bank has already offset RMB 25.0 million of the Company’s cash deposited with it against the amounts due and demanded the Company’s pledge of additional collateral.

 

During October and November 2012, representatives of the Company’s shareholders held several meetings regarding the restructuring of the Company, which would include raising additional funds by issuing new common shares to improve liquidity to support the Company’s operations and to strengthen its financial position. Under restructuring plans discussed on October 30, 2012, interested shareholders would inject new funds to increase the Company’s registered capital to meet the Company’s operational needs and to strengthen its financial position. These restructuring plans also contemplated recruiting a new management team, to be comprised of technical and management professionals who would be charged with improving the Company’s profitability and operating performance. As a form of incentive, the new management team would be entitled to certain share-based awards that would vest upon the achievement of certain performance conditions, as determined by the shareholders of the Company. See Note 3.

 

Followed a meeting of representatives of the Company’s shareholders on November 19, 2012, management of the Company determined that it was probable that shareholders would fail to agree to a restructuring plans for the Company, as one of the shareholders needed more time to evaluate the restructuring of the Company. The restructuring discussions among shareholders are still ongoing. The restructuring plans have not been finalized and no assurance can be given that finalization is probable.

 

17

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