Table of Contents





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K





(Mark
One)


x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
fiscal year ended: October 31,
2009




o  TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
transition period from __________ to __________





Commission
file number: 000-51704





PERFECTENERGY
INTERNATIONAL LIMITED


(Exact
name of registrant as specified in its charter)





Nevada
            98-0548438(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





No. 479 You Dong Road,
Xinzhuang Town, Shanghai, People’s Republic of China, 201100


(Address
of principal executive offices) (Zip Code)





Registrant’s
telephone number, including area code:  (8621)
5488-0958





Securities
registered pursuant to Section 12(b) of the Act: None


Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $0.001 par value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act     o
Yes     x No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   o
Yes     x No





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. x
Yes      o No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   o
Yes    o No





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o





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





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





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





As
of April 30, 2009, the last business day of the registrant’s most recently
completed second fiscal quarter, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was $4,478,556 based on
the closing sale price of $0.30 as reported by the OTC Bulletin Board and
14,928,521 shares held by non-affiliates.




As of
January 4, 2010, there were 29,626,916 shares of common stock
outstanding.









Table of Contents
   TABLE OF CONTENTS




Page
      No.PART IItem 1. Business
            4Item 1A. Risk Factors
            10Item 2. Properties
            21Item 3. Legal Proceedings
            21Item 4. Submission of Matters to a Vote of Security
      Holders
            21PART IIItem 5. Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
            22Item 6. Selected Financial Data
            23Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            23Item 7A. Quantitative and Qualitative Disclosures About
      Market Risk
            28Item 8. Financial Statements and Supplementary
      Data
            28Item 9. Changes in and Disagreements With Accountants on
      Accounting and Financial Disclosure
            29Item 9A(T). Controls and Procedures
            29Item 9B. Other Information
            30PART IIIItem 10. Directors, Executive Officers and Corporate
      Governance
            31Item 11. Executive Compensation
            33Item 12. Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
            36Item 13. Certain Relationships and Related Transactions,
      and Director Independence
            37Item 14. Principal Accounting Fees and
      Services
            37PART IVItem 15. Exhibits, Financial Statement
      Schedules
            38SIGNATURES
            39






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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION





This
annual report on Form 10-K contains forward-looking statements.  Such
forward-looking statements include statements regarding, among other things, (a)
our projected sales and profitability, (b) our growth strategies, (c)
anticipated trends in our industry, (d) our future financing plans, and (e) our
anticipated needs for working capital.  Forward-looking statements
that involve assumptions and describe our future plans, strategies, and
expectations are generally identifiable by use of the words “may,” “will,”
“should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project”
or the negative of these words or other variations on these words or comparable
terminology.  This information may involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, performance,
or achievements to be materially different from the future results, performance,
or achievements expressed or implied by any forward-looking
statements.  These statements may be found under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business,” as well as in this annual report generally.  Actual events
or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under “Risk Factors” and matters described in this annual report
generally.  This annual report may contain market data related to our
business that may have been included in articles published by independent
industry sources.  Although we believe these sources are reliable, we
have not independently verified this market data.  This market data
includes projections that are based on a number of assumptions.  If
any one or more of these assumptions turns out to be incorrect, actual results
may differ materially from the projections based on these
assumptions.  In light of these risks and uncertainties, there can be
no assurance that the forward-looking statements contained in this annual report
will in fact occur.  In addition to the information expressly required
to be included in this annual report, we will provide such further material
information, if any, as may be necessary to make the required statements, in
light of the circumstances under which they are made, not
misleading.




Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this annual report as well as other public reports
that may be filed with the United States Securities and Exchange
Commission.  You should not place undue reliance on any
forward-looking statement as a prediction of actual results or
developments.  We are not obligated to update or revise any
forward-looking statement contained in this annual report to reflect new events
or circumstances unless and to the extent required by applicable
law.  Neither the Private Securities Litigation Reform Act of 1995 nor
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”)
provides any protection for statements made in this annual report.





When used
in this annual report, the terms the “Company,” “Perfectenergy Nevada,” “we,”
“us,” “our,” and similar terms refer to Perfectenergy International Limited, a
Nevada corporation, and our subsidiaries.







- 3
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PART
I





ITEM
1.  BUSINESS.





Corporate
Overview





We were
originally incorporated on February 25, 2005 in the State of Nevada under our
former name “Crestview Development Corporation.”  On April 16, 2007,
we changed our name to “Perfectenergy International Limited.”





We
conduct operations through our wholly owned subsidiary, Perfectenergy
International Limited, a private British Virgin Islands corporation
(“Perfectenergy BVI”), and Perfectenergy BVI’s three wholly owned subsidiaries
(i) Perfectenergy (Shanghai) Limited, a company organized under the laws of the
People’s Republic of China (“Perfectenergy Shanghai”), (ii) Perfectenergy GmbH,
a German corporation (“Perfectenergy GmbH”), and (iii) Perfectenergy Solar-Tech
(Shanghai) Ltd., a company organized under the laws of the People’s Republic of
China (“Perfectenergy Solar-Tech”).





Perfectenergy
BVI was incorporated under the laws of the British Virgin Islands as an
International Business Company on April 1, 2005.  Perfectenergy
Shanghai was organized under the laws of the People’s Republic of China on July
8, 2005.  Perfectenergy Solar-Tech was incorporated in the PRC on
February 28, 2008.  Perfectenergy BVI, through Perfectenergy Shanghai
and Perfectenergy Solar-Tech, is principally engaged in the research,
development, manufacturing, and sale of solar cells, solar modules, and
photovoltaic systems.





We
conduct sales in Europe through Perfectenergy GmbH, which was formed in Germany
on November 9, 2007.  The principal function of Perfectenergy GmbH is
marketing, installation, and other after-sales services for our PV
products.





Our
principal offices are located at No. 479 You Dong Road, Xinzhuang Town, Shanghai
in the PRC.  We also have a German office located at Tannenweg 8,
53757 Sankt Augustin, Germany.





Our
Operations





Our
operations consist of the research, development, manufacturing, and sale of
solar cells, solar modules, and photovoltaic (“PV”) systems.  Our
manufacturing and research facility is located in Shanghai, China.





We have a
45 megawatt (“MW”) solar cell production line and a 60 MW solar panel lamination
line.  In our facility’s solar cell and solar panel lamination
production lines, we are able to produce different kinds of cells, such as
6-inch cells and 8-inch cells, mono-crystalline cells and multi-crystalline
cells, and different types and sizes of solar modules.  After the
manufacturing process, our products are put through a rigorous quality assurance
process.  All of our products are strictly in accordance with
international standards, such as IEC61215, TUV Safe Class II, and UL1703, in
order to maintain our competitiveness in international
markets.





We
believe that our manufacturing processes allow us to produce PV
solar products at a much lower cost than traditional solar cell
manufacturing for the same levels of production due to our lower capital
cost.  Our production line requires less capital
investment than traditional solar cell production lines for the same levels
of production due to the proprietary nature and in-house manufacturing of our
capital equipment, while the competition must import costly capital equipment
from Germany and Japan.





We also
have a sales and marketing force that is led by our Chief Executive
Officer.  Our targeted customers, besides our existing customers, are
mostly system integrators and distributors in the United States, Europe, and
China.





Principal
Products and Services





We
believe our photovoltaic (“PV”) cells and modules are highly competitive with
other products in the solar energy market in terms of efficiency and
quality.  We expect to continue improving the conversion efficiency
and power, and reducing the thickness, of our solar products as we continue to
devote significant financial and human resources in our various research and
development programs.





PV
Cells





We
design, manufacture, and market crystalline solar cells (approximately 6 inch
squares composed of silicon and glass) sold as crystalline solar modules (metal
grid structures housing 72 cells).






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A PV cell
is a silicon semiconductor device that converts sunlight into electricity by a
process known as the photovoltaic effect.  The following table sets
forth the specifications for samples of two types of PV cells we
produce:





PV
      Cell Type
            
            Dimensions
              (mm×mm)
            
            Conversion
              Efficiency (%)
            
            Thickness
              (microns)Monocrystalline
      silicon cell
            
            
            125x125
            
            
            16.50
      – 17.30
            %
            
            200-230Multicrystalline
      & Monocrystalline silicon cell
            
            
            156x156
            
            
            16.50
      – 17.30
            %
            
            200-230





The key
technical efficiency measurement of PV cells is the conversion efficiency
rate.  In general, the higher the conversion efficiency rate, the
lower the production cost of PV modules per watt because more power can be
incorporated into a given size package.  The average conversion
efficiency rate of our monocrystalline PV cells reached 17.3% in November 2008,
representing an increase from 18% in December 2005 when we began producing PV
cells.  We currently produce a variety of PV cells ranging from 200
microns to 230 microns in thickness.





PV Modules





A PV
module is an assembly of PV cells that is electrically interconnected and
laminated in a durable and weatherproof package.  Our solar cells are
often sold as components of assembled modules.  We are also developing
PV modules with higher power to meet the rising expansion of on-grid
configurations.  The majority of the PV modules we currently offer to
our customers range in power between 10W and 180W.  We also perform
limited original equipment manufacturing work for other solar cell producers,
such as selling standalone solar modules.  We sell approximately 90%
of our PV modules under our “Perfectenergy” brand and approximately 10% of our
PV modules under the brand names of our customers.





Distribution





We sell
our products to a number of systems integrators and distributors, primarily
located in Germany, Spain, and Italy, who purchase their solar modules, purchase
software, and hardware from other vendors and integrate and install the
end-product for customers.  Many of our customers, in turn, sell
turnkey solar systems to end-users that include individual owners of
agricultural buildings; owners of commercial warehouses, offices, and industrial
buildings; public agencies and municipal government authorities that own
buildings suitable for solar system deployment; owners of land designated as
former agricultural land, waste land, or conversion land, such as former
military bases or industrial areas; and financial investors that desire to own
large scale solar projects.





Market
and Industry Overview





The solar
power market has experienced rapid growth in the past several
years.  According to Solarbuzz LLC, an independent solar energy
research firm, the global solar PV market will reach 6.37 GW in
2009.  According to a Solarbuzz forecast titled "Green World," in one
of several possible scenarios, annual solar power system installed capacity may
further increase to 9,917 MW in 2012, and solar power industry revenue may
increase from $17.2 billion in 2007 to $39.5 billion in
2012.





We
believe the solar power market will continue to experience growth as a result of
the growing adoption of government incentives for solar energy sources, rising
energy demand and limited fossil energy sources, and the growing awareness of
the advantages of solar energy, all of which are discussed below.





Growing
Adoption of Government Incentives for Solar and Other Renewable Energy
Sources





In
response to the increasing environmental concerns worldwide, many governments
have promulgated regulations and implemented policies to limit the release of
hazardous and greenhouse gases, such as carbon dioxide, and to encourage the use
of renewable energy sources.  Due to the fact that most renewable
energy sources are currently less cost competitive than traditional energy
sources, a growing number of countries have created incentive programs for the
solar sector, including:





·
            direct
      subsidies to end users to counter costs of equipment and
      installation;





·
            net
      metering laws enabling on-grid end users to sell electricity back to the
      grid at retail prices;





·
            government
      standards mandating minimum consumption levels of renewable energy
      sources; and





·
            low
      interest loans and tax incentives to finance solar power
      systems.






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Due to
government support in the past decade, solar energy has become an attractive
alternative to traditional energy sources.  Set forth below are brief
descriptions of the incentive programs adopted by the following selected
countries:




China. China produces over 30%
of the world's solar PV, and, according to statistics from the Chinese
government, installed PV in China only reached a total of 140MW in 2008,
accounting for less than 1% of the global market share.  With cheaper
raw materials and PV technology innovation, however, solar electricity cost in
China is estimated to have declined by 50% from 2006 to 2008, making solar power
a strong candidate to become a major energy resource.  Falling solar
power generation cost and rising demand as the main drivers for the uptake,
China revised its 2020 target for solar power capacity from 1.8 GW to 20
GW.  In February 2005, China enacted the Renewable Energy Law, which
became effective in January 2006.  This law provides certain financial
incentives for the development of renewable energy projects.  Various
local authorities have also introduced initiatives to encourage the adoption of
renewable energy, including solar energy.  In addition, the government
has enacted several policies to support the solar industry, including a regional
feed-in tariff and national subsidies for solar PV installations such as subsidy
scheme on rooftop projects.  We expect that the increase in solar
energy consumption in local municipalities will encourage further growth of the
solar energy industry in China.




The
Chinese government granted us an income tax exemption for the years ended
December 31, 2006 and 2005, and we are entitled to receive a 50% reduction of
our regular income tax rate of 33% from January 2007 to December 31,
2009.  The Chinese government also granted us a refund on value added
taxes (“VAT”), which are imposed on exported goods at a 17%
rate.  Enterprises or individuals who sell products, engage in repair
and maintenance, or import and export goods in China are subject to VAT in
accordance with Chinese laws.  The standard VAT is 17% of the gross
sales price.  To the best of our knowledge, we are not eligible to
receive similar subsidies or incentives from any other government.




Germany.   Under its
Renewable Energy Sources Act, Germany aims to increase the share of electricity
from renewable energy to 12.5% by 2010 and 20% by 2020.  In
particular, the Renewable Energy Sources Act requires electricity transmission
grid operators to connect various renewable energy sources to their electricity
transmission grids and to purchase all electricity generated by such sources at
guaranteed feed-in tariffs.  Additional regulatory support measures
include investment cost subsidies, low-interest loans, and tax relief to end
users of renewable energy.





Italy.   Before
2005, the Italian PV market benefited primarily from regional support for PV
installations with grants of up to 65% of investment in the absence of national
incentive funds.  In 2005, Italy passed a new law that set fixed
feed-in tariffs for electricity produced from renewable energy
sources.  The incentives are available to individuals, companies, and
public bodies.  In January 2006, the Italian government approved
various measures relating to PV feed-in tariffs, including increasing the PV
feed-in tariff cap to 500 MW by 2015.





Japan.   The
Japanese government has implemented a series of incentive programs, including
the “PV 2030” roadmap that outlines government policies to support solar power
electricity.  Japan also provides government subsidies for research
and development.





Spain.   The
incentive regime in Spain includes a national net metering program and favorable
interest loans. The actual feed-in tariff for solar energy in Spain is fully
guaranteed for 25 years and guaranteed at 80% for subsequent
years.  The target for cumulative installed generation capacity from
PV in 2010 was recently raised by the Spanish government to
400 MW.





United States.   At
the federal level, several recent developments are favorable to the PV industry
in general in the United States.  The United States Congress approved
the Energy Policy Act of 2005, which provides a 30% investment tax credit for PV
installations.  With the “Extension and Modification of Solar Energy and
Fuel Cell Investment Tax Credit” bill passed by Congress in 2008, the tax credit
for PV installation was extended through 2016.  This bill lifted a
limitation that prevented public utilities from claiming the investment tax
credit, which may increase solar panel sales to U.S. utilities that now qualify
to receive a 30% tax credit for their first PV installation.  The bill
also allows these credits to be used to offset the alternative minimum tax
(AMT).  Further, President Obama’s New Energy for America plan set
forth the goal for 10% of electricity generated in the U.S. to come from
renewable energy sources by 2012 and 25% by 2025.  In addition, a
number of states, including California and New Jersey, have committed
substantial resources to developing and implementing renewable energy
programs.  Under the California Solar Initiative, an investment of
$3.2 billion will be made from 2006 to 2017 for the installation of 1 million PV
plants with the total output of more than 3,000MW.  Investors in these
PV plants will get refunds from the state and federal governments of
approximately 75% of their total investment, and the investors are to receive a
guaranteed profit of 12% on average for the electricity produced by their PV
plants with certificates of green power.  In April 2006, the New
Jersey Board of Public Utilities voted to approve new regulations which expand
the state’s Renewable Portfolio Standard by extending the existing goals out to
2020 and increasing the required amount of renewable energy and solar
energy.  Under the newly adopted regulations, 20% of New Jersey’s
electricity must come from renewable sources by 2020.  The New Jersey
regulations also include a 2% solar set aside, which is forecast to require
1,500MW of electricity to be generated through solar power, the largest solar
commitment relative to population and electricity consumption in the United
States.





Rising
Energy Demand and Limited Fossil Energy Sources with Increasing
Prices





In recent
years, global economic development has resulted in surging energy demand and
rising energy prices.  Electric power demand is expected to increase
from 16.1 trillion kilowatt hours in 2002 to 31.7 trillion kilowatt hours by
2030 globally.  Meanwhile, the generation of electric power is
capacity-constrained and dependent upon fossil fuel feedstock.  The
situation is compounded by the finite supply of traditional energy sources, such
as natural gas, coal, and petroleum.  In addition, petroleum prices
have risen dramatically because of war, political instability, labor unrest, and
the threat of terrorism in oil-producing regions.  Further, for
national security reasons, many governments seek to further develop domestic
sources of energy.  Thus, future energy demand is increasingly
expected to be met by renewable energy sources, such as solar
energy.






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Growing Awareness
of the Advantages of Solar Power





Solar
power offers a variety of advantages over other sources of power, including an
absence of the need for fuel, environmental cleanliness, location based energy
production, greater efficiency during peak demand periods, high reliability, and
modularity.  These advantages include the following:




No fossil fuel
requirement.
  Solar power relies solely on sunlight rather than traditional fossil
fuels that have historically experienced supply constraints, volatile pricing
and delivery risk.





Clean energy production.   Unlike
traditional fossil fuel energy sources and many other renewable energy sources,
solar power systems generate electricity with no emissions or noise
impact.





Location-based energy
production.   Solar power is a distributed energy source,
meaning that the electricity can be generated at the site of
consumption.  This provides a significant advantage to the end user
who is not reliant upon the traditional electricity infrastructure for delivery
of electricity to the site of use.





Energy generated to match peak usage
times.   Peak energy usage and high electricity costs typically
occur mid-day, which also generally corresponds to peak sunlight hours and solar
power electricity generation.





Reliable Source of
Electricity. Solar power systems generally do not contain
moving parts, nor do they require significant ongoing
maintenance.





Modular. Solar
power systems are made from interconnecting and laminating solar cells into
solar modules.  Given this method of construction, solar power
products can be deployed in many different sizes and configurations to meet
specific customer needs.





Challenges
Facing the Solar Power Industry





Although
solar power has several advantages and is an attractive alternative to
traditional energy sources, there remain certain key challenges that the solar
power industry must overcome to accomplish broad commercialization of its
products, including the following:





Possible Reduction or Elimination of
Government Subsidies and Incentives.   The current growth of
the solar power industry substantially relies on the availability and size of
government subsidies and economic incentives, such as capital cost rebates,
reduced tariffs, tax credits, net metering, and other
incentives.  Governments may eventually decide to reduce or eliminate
these subsidies and economic incentives.  It remains a challenge for
the solar power industry to reach sufficient scale to be cost-effective in a
non-subsidized marketplace.





High Cost of Solar Power.
  Generally, the per kilowatt-hour cost of generating solar
electricity, including the upfront capital costs, is greater than retail
electricity rates.  While government policy mechanisms and heightened
consumer awareness are driving solar power adoption, the cost of solar power
products remains an impediment to growth.  To address this issue,
manufacturers must improve the cost efficiency of solar power systems through
innovation and continuous improvement of production techniques.  For
example, improving conversion efficiencies of solar cells will reduce raw
material requirements and lower costs required to manufacture a solar power
system with a given output.  Higher conversion efficiencies also
decrease the size of the solar power system, and thereby lower the system
installation costs.





Shortages of Raw Materials.
  Polysilicon is the main raw material used in manufacturing our solar
cells.  Currently, there is some relief in the supply shortage of
polysilicon in the industry.  However, due to strong demands in the PV
products in next few years, we believe that the industry-wide shortage of
polysilicon will continue to have a material impact on our liquidity because
suppliers will likely require more advance payments for the polysilicon that
they supply to us as our production expands.  Further, a shortage may
also have a material effect on our results of operations because a shortage will
likely cause the price of polysilicon to rise.  Such increase will
likely cause an increase in the cost of producing our products especially if we
must obtain more polysilicon in the market to produce our products as our
production expands in the future.  In addition, we believe effective
supply chain management is critical to ensure continued growth for the
industry.





Competition





The
global solar power market is highly competitive and has rapidly
evolved.  Various government incentive and subsidy programs
implemented in the United States, Europe, China, Japan, and other countries in
recent years have further induced competition in solar energy product
marketplace.  In particular, a large number of manufacturers have
entered the solar market.




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Our main
overseas competitors, including those in the United States, include BP Solar,
Kyocera Corporation, Mitsubishi Electric Corporation, Motech Industries Inc.,
Sharp Corporation, Q-Cells AG, Sanyo Electric Co., Ltd., and Sunpower
Corporation.  Our primary competitors in China include Suntech Power
Holding’s Co., Ltd., Baoding Tianwei Yingli New Energy Resources Co., Ltd., and
Nanjing PV-Tech Co., Ltd.




We
compete primarily on the basis of the power efficiency, quality, performance,
and appearance of our products, price, strength of supply chain and distribution
network, after-sales service, and brand image.  Many of our
competitors, however, have longer operating histories and significantly greater
financial or technological resources than we do and enjoy greater brand
recognition.  Some of our competitors are vertically integrated and
design and produce upstream silicon wafers, mid-stream PV cells and modules, and
downstream solar application systems, which provide them with greater synergies
to achieve lower production costs.  During periods when there is a
shortage of silicon and silicon wafers, we compete intensely with our
competitors in obtaining adequate supplies of silicon wafers. Moreover, many of
our competitors are developing next-generation products based on new PV
technologies, including amorphous silicon, transparent conductive oxide thin
film, carbon material, and nano-crystalline technologies, which, if successful,
will compete with the crystalline silicon technology we currently use in our
manufacturing processes.  We are seeking to develop new technologies
and products through our research collaborations.





We, like
other solar energy companies, also face competition from traditional non-solar
energy industries, such as the petroleum and coal industries.  The
production cost per watt of solar energy is significantly higher than other
types of energy.  As a result, we cannot provide assurances that solar
energy will be able to compete with other energy industries in the long-term,
especially if there is a reduction or termination of government incentives and
other forms of support for solar energy.





Sources
and Availability of Raw Materials





Our
manufacturing process uses approximately 20 types of raw materials and
components that undergo a qualification process to construct a complete solar
module.  We currently source these raw materials and components from
domestic suppliers in China, and most of our critical materials and components
are either sourced from only one supplier or supplied by a limited number of
suppliers.  Supply of these materials is stable for the most part as a
result of the maturity of solar related production in China.





One key
raw material in our production process is silicon wafers.  We purchase
all of our silicon wafers from a limited number of suppliers.  We have
long term supply contracts with two major suppliers, which provides for monthly
price adjustments based on the spot rate of silicon.  These contracts
are more fully described below under “Principal Suppliers.”





Principal
Suppliers





Silicon
is essential for manufacturing our products and, as noted above, silicon
manufacturers are not currently able to keep up with demand. We
have long-term silicon supply agreements with both Tianjin Huan-ou Semiconductor
Material Technology Co., Ltd. (“Tianjin Huan-ou”) and Chengdu Jiayang Silicon
Technology, Inc., Ltd. (“Chengdu”).





Our
purchase obligations under the long-term silicon supply contract with
Chengdu is 1 million silicon wafers in 2010, 1.2 million silicon wafers in
2011, and 1.5 million silicon wafers in 2012.  Due to fluctuations in
the silicon supply market, the purchasing price of these silicon wafers will be
based on market conditions.





We also
entered into a five-year long-term supply contract with Tianjin Huan-ou on July
20, 2008, which contract was clarified by a subsequent amendment to have an
effective date of January 1, 2009.  Under the contract, Perfectenergy
Shanghai was to make an advanced payment in the aggregate amount of
approximately $14,700,000 (the “Advanced Payment”) to Tianjin Huan-ou by April
20, 2009, 20% of which would be refunded by Tianjin Huan-ou to Perfectenergy
Shanghai by October 31 of each year during the term of the agreement, starting
in 2009.  As of January 16, 2009, Perfectenergy Shanghai paid
approximately $4,400,000 of the Advanced Payment to Tianjin
Huan-ou.  During the effectiveness of the agreement, Tianjin Huan-ou
was to supply Perfectenergy Shanghai with monocrystalline silicon solar wafers
pursuant to the following annual supply schedule: 12.75 million pieces in 2009;
17.15 million pieces in 2010; 17.20 million pieces in 2011; 17.26 million pieces
in 2012; and 17.35 million pieces in 2013.




On
January 21, 2009, we entered into an amendment to the supply agreement with
Tianjin Huan-ou to change the due date of the Advanced Payment from December 20,
2008 to April 20, 2009.  Also, the price per piece for future
deliveries was amended from a fixed price to a price to be negotiated between
the parties based on the then-current market price.  We are currently
in negotiations to further amend the terms of the Advanced Payment.




We
believe that these arrangements will help us obtain a sufficient supply of
silicon at a reasonable price for the coming years and when we expand our
production capacity.




Other
materials needed to produce cells and modules, such as chemicals, special-made
glasses, etc. are relatively easy to purchase from multiple vendors, and we
intend to work with two to three vendors to ensure the best pricing and quality
of these supplies.




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Customers





We sell
our products to a number of systems integrators and distributors, mostly located
in Europe and China, who purchase solar cells and solar modules from us,
software and hardware from other vendors, and then integrate and install the
end-product for their customers.  These systems integrators sell
turnkey solar systems to end-users that include the following:




·
            Individual
      owners of agricultural buildings,·
            Owners
      of commercial warehouses, offices, and industrial
    buildings,





·
            Public
      agencies and municipal government
authorities,





·
            Owners
      of land designated as former agricultural land, waste land, or conversion
      land, such as former military bases or industrial areas,
    and





·
            Financial
      investors interested in owning large scale solar
  projects.





Our top
three customers by value, who accounted for 27% of our revenue during the fiscal
year ended October 31, 2009, are as follows:





·
            Alpensolar
      GmbH, accounting for 13% of
revenue;




·
            Abidas
      GmbH, accounting for 8% of revenue;
and





·
            Solardirect
      GmbH, accounting for 6% of revenue.





Intellectual
Properties and Licenses





The
following table describes the intellectual property owned by the Company:





Type
            
            Name
            
            Issued
      by
            
            Duration
            
            DescriptionTrademark
            
            
            
            Trademark
      Bureau of the People’s Republic of China
            
            Ten
      years from 2009 to 2019 (and renewable within six months prior to the end
      of each ten-year term for additional ten-year periods)
            
            Logo,
      brand name used in our productsPatent
            
            Solar
      cell fire furnace equipment
            
            Intellectual
      Property Bureau of the People’s Republic of China
            
            May
      25, 2006 to May 25, 2016 (10 years)
            
            To
      increase cell efficiency with proper cell production
    techniquePatent
            
            Solar
      wafer drying equipment
            
            Intellectual
      Property Bureau of the People’s Republic of China
            
            May
      17, 2006 to May 17, 2016 (10 years)
            
            To
      dry wafers more effectively, thus improving quality and increasing
      yieldPatent
            
            Preparation
      method of Chalcogenide Glass (with Rare Earth elements)
            
            Intellectual
      Property Bureau of the People’s Republic of China
            
            July
      11, 2003 to July 10, 2013
            
            To
      improve efficiency in absorption of sunlight to PV module
      system


We are
certified by IEC61215 and Safety Class II for TUV.  Both IEC and TUV
are international standards for electronic appliances.  We also
applied for UL certification (standards for electronic appliance in the United
States), and we expect this certification process to be completed in early
2010.






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We have
also filed applications for three patents in Shanghai, which are currently being
reviewed by local authority.





Research
and Development





During
the fiscal years ended October 31, 2009 and October 31, 2008, we incurred
$409,148 and $221,016, respectively, for research and development primarily
related to the development of new types of crystalline PV cells as well as
improvement on the conversion efficiency of PV cell and module
products.





Environmental
Matters





Our
manufacturing processes generate noise, wastewater, gaseous wastes, and other
industrial wastes.  We have various types of anti-pollution equipment
installed in our facilities to reduce, treat, and, where feasible, recycle the
wastes generated in our manufacturing process.  We outsource the
treatment of some of our wastewater and other liquid wastes to third-party
contractors.





Our
operations are subject to regulation and periodic monitoring by local
environmental protection authorities in Shanghai.  In conjunction with
our efforts with the construction of our new solar cell production facility, we
are planning to further improve management of the environmental issues relating
to our operations, including application for ISO 14001 certification in
2010.  ISO 14001 prescribes standards for management of
organizations to achieve an effective environmental management
system.





Employees





As of
January 4, 2010, we had approximately 200 employees, all of which are full-time
employees.







ITEM 1A.  RISK FACTORS.





The
statements contained in or incorporated into this report that are not historic
facts are forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set forth in or
implied by forward-looking statements.  If any of the following risks
actually occurs, our business, financial condition, or results of operations
could be harmed.





Risks Related to Our Company
and Our Industry





Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.




We
consider our company a young company with a limited operating history that
started in 2005.  Our limited operating history and the
unpredictability of our industry may make it difficult for investors to evaluate
our business and future operating results.  The risks and difficulties
we face include challenges in accurate financial planning as a result of limited
historical data and the uncertainties resulting from having had a relatively
limited time period in which to implement and evaluate our business strategies
as compared to older companies with longer operating histories.




In
August 2007, we raised $18.4 million in a private offering of our common stock
and warrants that we use for our operations. We may be unable to manage the
expansion of our operations effectively, which could have an adverse effect on
our business and results of operations.





We raised
$18,400,000 through a private offering of our common stock and warrants on
August 8, 2007.  We have used and continue to use funds raised in this
financing for our operations and continued expansion of our business to address
the growth in demand for solar power products and services, as well as to
capture new market opportunities.  These expansion plans included, but
were not limited to, the construction of additional production lines, the hiring
of additional management and personnel, and the purchase of assets from other
companies.  We cannot, however, make assurances that our current and
planned operations, personnel, systems, and internal procedures and controls
will be adequate to support this growth.  If we are unable to manage
our growth effectively, we may be unable to take advantage of market
opportunities, execute our business strategies, or respond to competitive
pressures, any of which could have an adverse affect on our business and results
of operations.





The reduction or elimination of
government subsidies and economic incentives for on-grid solar energy
applications could cause a reduction in demand for our products and lead to a
decrease in revenue.




We
believe that the growth in many of the markets for our products, including our
current largest markets such as Germany, depends in part on the availability and
amounts of government subsidies and economic incentives. At present, the cost of
solar energy substantially exceeds the retail price of electricity in most
markets in the world.  As a result, federal and local governmental
bodies in many countries, most notably Germany, Spain, and the United States,
have provided subsidies in the form of cost reductions, tax write-offs, and
other incentives to end users, distributors, systems integrators, and
manufacturers of solar power products.  Reduction or elimination of
these government subsidies and economic incentives because of policy changes,
fiscal tightening, or other reasons may result in the diminished competitiveness
of solar energy and materially and adversely affect the growth of these markets
and our revenues.  Electric utility companies that have significant
political lobbying powers may push for a change in the relevant legislation in
their markets.  The reduction or elimination of government subsidies
and economic incentives for on-grid solar energy applications, especially those
in our target markets, could cause our revenues to decline and materially and
adversely affect our business, financial condition, and results of
operations.




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If
solar power technology is not suitable for widespread adoption, or sufficient
demand for our products does not develop or takes longer to develop than we
anticipated, our sales may not continue to increase or may even decline, and we
may be unable to sustain profitability.





The solar
power market is at a relatively early stage of development and the extent to
which our solar power products will be widely adopted is
uncertain.  Historical and current market data in the solar power
industry are not as readily available as those in other more established energy
industries where trends can be assessed more reliably from data gathered over a
longer period of time.  If solar power technology proves unsuitable
for widespread adoption or if demand for our products fails to develop
sufficiently, we may be unable to grow our business or generate sufficient
revenues to sustain our profitability.  In addition, demand for solar
power products in our targeted markets, including China and the United States,
may not develop or may develop to a lesser extent than we
anticipate.  Many factors may affect the viability of widespread
adoption of solar technology and demand for solar products,
including:





·
            performance
      and reliability of solar power products compared to conventional and other
      non-solar energy sources and products;·
            cost-effectiveness
      of solar power products compared to conventional and other non-solar
      energy sources and products;·
            availability
      of government subsidies and incentives to support the development of the
      solar power industry;·
            fluctuations
      in economic and market conditions that affect the viability of
      conventional and non-solar alternative energy sources, such as increases
      or decreases in the prices of oil and other fossil
  fuels;·
            capital
      expenditures by end-users of solar power products, which tend to decrease
      when economy slows down;·
            success
      of other alternative energy generation technologies, such as fuel cells,
      wind power, and biomass technologies; and·
            deregulation
      of the electric power industry and broader energy
  industry.





The
failure of the market for solar energy products to develop or the development of
the solar energy product market to a lesser extent than we anticipate could have
a material adverse effect on our business.





Because
we face intense competition from other companies producing solar energy and
other renewable energy products and many of our competitors have greater
resources than we do, we may be unable to compete successfully and may lose or
be unable to gain market share.





The
market for solar energy products is intensely competitive and rapidly evolving.
Many of our competitors have established more prominent market positions, and if
we fail to attract and retain customers and establish successful distribution
networks in our target markets for our products, we will be unable to increase
our sales.  Our competitors include solar power divisions of large
conglomerates such as BP Solar, Kyocera, Royal Dutch Shell, Sharp Corporation,
and Sanyo, as well as specialized cell and module manufacturers such as Q-Cells
AG and Solarfun Power Holdings Co., Ltd. as well as integrated manufacturers of
PV products such as SolarWorld AG. Some of our competitors, such as Renewable
Energy Corporation, have also become vertically integrated, from upstream
silicon wafer manufacturing to solar system integration.  We expect to
compete with future entrants to the solar energy product market that offer new
technological solutions.  We may also face competition from
semiconductor manufacturers, a few of which have already announced their
intention to start production of PV cells.  Many of our competitors
are developing or currently producing products based on new solar energy
technologies, including amorphous silicon, ribbon, sheet, and nano technologies,
which they believe will ultimately cost the same as or less than crystalline
silicon technologies.  In addition, the entire solar energy industry
also faces competition from conventional and non-solar renewable energy
technologies.  Due to the relatively high manufacturing costs compared
to most other energy sources, solar energy is generally not as competitive with
other energy sources without government incentive and subsidy
programs.




Many of
our existing and potential competitors have substantially greater financial,
technical, manufacturing, and other resources than we do.  Our
competitors’ greater size in some cases provides them with a competitive
advantage with respect to manufacturing costs because of their economies of
scale and their ability to purchase raw materials at lower
prices.  For example, those of our competitors that also manufacture
semiconductors may source both semiconductor grade silicon wafers and solar
grade silicon wafers from the same supplier.  As a result, those
competitors may have stronger bargaining power with the supplier and have an
advantage over us in negotiating favorable pricing, as well as securing silicon
wafer supplies at times of shortages.  Many of our competitors also
have greater brand name recognition, more established distribution networks, and
larger customer bases.  Also, many of our competitors have
well-established relationships with our current and potential distributors and
have extensive knowledge of our target markets.  As a result, they may
be able to devote greater resources to the research, development, promotion, and
sale of their products or respond more quickly to evolving industry standards
and changes in market conditions than we can.  Our failure to adapt to
changing market conditions and to compete successfully with existing or new
competitors may materially and adversely affect our financial condition and
results of operations.




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Our failure to further refine our
technology and develop and introduce new solar energy products could render our
products uncompetitive or obsolete, and reduce our sales and market
share.





The solar
energy industry is characterized by rapid increases in the diversity and
complexity of technologies, products, and services.  We will need to
invest significant financial resources in research and development to keep pace
with technological advances in the solar energy industry, evolving industry
standards, and changing customer requirements.  Research and
development activities, however, are inherently uncertain, and we may encounter
practical difficulties in commercializing our research results.  Our
significant expenditures on research and development may not reap corresponding
benefits.  A variety of competing solar energy technologies that other
companies may develop could prove to be more cost-effective and have better
performance than our solar energy products.  Therefore, our
development efforts may be rendered obsolete by the technological advances of
others.  Breakthroughs in solar energy technologies that do not use
crystalline silicon could mean that companies such as ours that rely entirely on
crystalline silicon would encounter a sudden, sharp drop in
sales.  Our failure to further refine our technology and develop and
introduce new solar energy products could render our products uncompetitive or
obsolete, and result in a decline in our market share.




Our future success substantially
depends on our ability to significantly increase both our manufacturing capacity
and output.  Our ability to achieve our expansion goals is subject to
a number of risks and uncertainties.





Our
future success depends on our ability to significantly increase both our
manufacturing capacity and output.  If we are unable to do so, we may
be unable to expand our business, decrease our costs per watt, maintain our
competitive position, and improve our profitability.  Our ability to
establish additional manufacturing capacity and increase output is subject to
significant risks and uncertainties, including the following:




·
            the
      need to raise significant additional funds to purchase and prepay for raw
      materials and to build additional manufacturing facilities, which we may
      be unable to obtain on reasonable terms or at all;·
            delays
      and cost overruns as a result of a number of factors, many of which may be
      beyond our control, such as increases in raw materials prices and problems
      with equipment vendors;





·
            delays
      or denial of required approvals by relevant government
      authorities;





·
            diversion
      of significant management attention and other resources;
    and





·
            failure
      to execute our expansion plan
effectively.





If we are
unable to establish or successfully operate additional manufacturing capacity or
to increase manufacturing output, or if we encounter any of the risks described
above, we may be unable to expand our business as planned.  Moreover,
we cannot provide assurances that if we do expand our manufacturing capacity and
output we will be able to generate sufficient customer demand for our PV
products to support our increased production levels.




Our
inability to obtain sufficient quantities of silicon and silicon wafers could
adversely affect our business and results of operations and limit our ability to
further expand.





Silicon
wafers are the essential raw materials for making our solar power
products.  To maintain competitive manufacturing operations, we will
depend on our suppliers’ timely delivery of quality silicon wafers in sufficient
quantities and at acceptable prices.  Silicon wafer suppliers, in
turn, depend on silicon manufacturers to supply silicon required for the
production of silicon wafers.  We formed a strategic multi-party
alliance with both upstream and downstream partners in an effort to obtain a
reliable supply of silicon.  Significant growth of the solar power
industry, however, has resulted in a significant increase in demand for silicon
and silicon wafers, and some producers have, from time to time, experienced late
delivery and supply shortages.  In particular, some suppliers of
silicon also supply to silicon wafer manufacturers for the semiconductor
industry, which typically have greater buying power and market influence than
manufacturers for the solar power industry.  As a result, increases in
the demand for silicon from the semiconductor industry may, in the future,
result in late deliveries or supply shortages with respect to the specialized
silicon that silicon wafer suppliers need as raw materials.  To date,
our business has not been impacted by a supplier’s late delivery or any supply
shortages of silicon.  Any shortage of silicon or our inability to get
silicon when we need it, however, could result in a reduction of manufacturing
output, delayed or missed shipments, damaged customer relationships, and
decreased revenues, any of which may adversely affect our business, our results
of operations, and our future expansion plans.




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Our gross margins may be materially
and adversely affected as a result of entering into fixed price, prepaid
arrangements with our suppliers.





We plan
to secure our supply of silicon wafers increasingly through long-term contracts
with suppliers.  We currently have two three-year silicon wafer supply
contracts with Tianjin Huan-ou Semiconductor Material Technology Co., Ltd.
(“Tianjin Huan-ou”) and Chengdu Jiayang Silicon Technology, Inc., Ltd., under
which these suppliers agreed to provide us with specified quantities of silicon
wafers at agreed prices from 2007 through 2009.  We also have a
five-year supply contract with Tianjin Huan-ou, under which Tianjin Huan-ou
agreed to provide us with specified quantities of solar wafers at agreed prices
through 2013.  If the price of silicon or silicon wafers were to
decrease in the future and we were locked into fixed price, prepaid
arrangements, we may be unable to adjust our materials costs, which may
negatively affect our gross margins.  Additionally, if demand for our
solar power products decreases, we may incur costs associated with carrying
excess materials, which may have a material adverse effect on our operating
expenses.  To the extent that we are unable to pass these costs and
expenses to our customers, our business, results of operations, and financial
condition may be materially and adversely affected.  Moreover, since
some of our supply contracts may require pre-payment of a substantial portion of
the contract price, we may be unable to recover such pre-payments and would
suffer losses should such suppliers fail to fulfill their delivery obligations
under the contracts.




Our dependence on a limited number of
third-party suppliers for key raw materials and customized manufacturing
equipment could prevent us from timely delivering our products to our customers
in the required quantities, which could result in order cancellations and
decreased revenues.





We
purchase raw materials from a limited number of third-party
suppliers.  Our suppliers of silicon include Tianjin Huan-ou
Semiconductor Material Technology Co., Ltd. and Chengdu Jiayang Silicon
Technology Inc. Ltd.  If we fail to develop or maintain our
relationships with these or our other suppliers, we may be unable to manufacture
our products or our products may be available at a higher cost or after a long
delay, and we could be prevented from delivering our products to our customers
in the required quantities and at prices that are
profitable.  Problems of this kind could cause us to experience order
cancellations and loss of market share.  The failure of a supplier to
supply materials and components that meet our quality, quantity, and cost
requirements in a timely manner could impair our ability to manufacture our
products or increase our costs, particularly if we are unable to obtain these
materials and components from alternative sources on a timely basis or on
commercially reasonable terms.  In addition, certain of our
manufacturing equipment has been designed and made specifically for
us.  As a result, such equipment is not readily available from
multiple vendors and would be difficult to repair or replace.  Any
significant damage to, or break down of, our customized manufacturing equipment
could cause material interruptions to our operations and, consequentially, could
have a material adverse effect on our business and results of
operations.




We
face risks associated with the marketing, distribution, and sale of our PV
products internationally, and if we are unable to effectively manage these
risks, our ability to expand our business abroad could be impaired.





In the
fiscal year ended October 31, 2009, we sold 86% of our products to customers
outside of China.  The marketing, international distribution, and sale
of our PV products expose us to a number of risks, including the
following:




·
            fluctuations
      in currency exchange rates;·
            difficulty
      in engaging and retaining distributors who are knowledgeable about and,
      can function effectively in, overseas markets;·
            increased
      costs associated with maintaining marketing efforts in various
      countries;·
            difficulty
      and costs relating to compliance with various commercial and legal
      requirements of the overseas markets in which we offer our
      products;·
            inability
      to obtain, maintain, or enforce intellectual property
      rights; and·
            trade
      barriers such as export requirements, tariffs, taxes, and other
      restrictions and expenses that could increase the prices of our products
      and make us less competitive in some
countries.




Our business depends substantially on
the continuing efforts of our executive officers and our ability to maintain a
skilled labor force, and our business may be severely disrupted if we lose such
services.





Our
future success depends substantially on the continued services of our executive
officers, especially Wennan Li, our Chairman of the Board and Chief Executive
Officer.  We do not maintain key man life insurance on any of our
executive officers.  If one or more of our executive officers are
unable or unwilling to continue in their present positions, we may be unable to
replace them readily, if at all.  In such a situation, our business
may be severely disrupted, and we may incur additional expenses to recruit and
retain new officers.  In addition, if any of our executives joins a
competitor or forms a competing company, we may lose some of our
customers.  Each of our executive officers has entered into employment
agreements with us that contain confidentiality and non-competition
provisions.  If, however, any dispute arises between our executive
officers and the Company, we cannot assure you, in light of uncertainties
associated with the Chinese legal system, the extent to which any of these
agreements could be enforced in China, where some of our executive officers
reside and hold assets.




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If we are unable to attract, train,
and retain technical personnel, our business may be materially and adversely
affected.





Our
future success depends, to a significant extent, on our ability to attract,
train, and retain technical personnel.  Recruiting and retaining
capable personnel, particularly those with expertise in the solar power
industry, are vital to our success.  There is substantial competition
for qualified technical personnel, and there can be no assurance that we will be
able to attract or retain our technical personnel.  We depend on the
management team to recruit and train such capable personnel, but if our
management team is unable to attract and retain qualified employees, our
business may be materially and adversely affected.




Our failure to protect our
intellectual property rights may undermine our competitive position, and
litigation to protect our intellectual property rights or defend against
third-party allegations of infringement may be costly.





We rely
primarily on patent, trademark, trade secret, copyright law, and other
contractual restrictions to protect our intellectual
property.  Nevertheless, these afford only limited protection and the
actions we take to protect our intellectual property rights may not be
adequate.  For example, we have three issued patents and three pending
patent applications in China.  We cannot assure you that our patent
applications will be issued with claims sufficiently broad for our
business.  As a result, third parties may infringe or misappropriate
our proprietary technologies or other intellectual property rights, which could
have a material adverse effect on our business, financial condition, or
operating results. In addition, policing unauthorized use of proprietary
technology can be difficult and expensive.  Litigation may be
necessary to enforce our intellectual property rights, protect our trade
secrets, or determine the validity and scope of the proprietary rights of
others.  We cannot assure you that the outcome of such potential
litigation will be in our favor.  Such litigation may be costly and
may divert management attention as well as expend our other resources away from
our business.  An adverse determination in any such litigation will
impair our intellectual property rights and may harm our business, prospects,
and reputation.  In addition, we have no insurance coverage against
litigation costs and would have to bear all costs arising from such litigation
to the extent we are unable to recover them from other parties.  The
occurrence of any of the foregoing could have a material adverse effect on our
business, results of operations, and financial condition.





Implementation
of China’s intellectual property-related laws has historically been lacking,
primarily because of ambiguities in China’s laws and difficulties in
enforcement.  Accordingly, intellectual property rights and
confidentiality protections in China may not be as effective as in the United
States or other countries.





We may be exposed to infringement or
misappropriation claims by third parties that, if determined adversely to us,
could cause us to pay significant damage awards.





Our
success also depends largely on our ability to use and develop our technology
and know-how without infringing the intellectual property rights of third
parties. The validity and scope of claims relating to solar power technology
patents involve complex scientific, legal and factual questions, and analysis
and, therefore, may be highly uncertain.  We may be subject to
litigation involving claims of patent infringement or violation of intellectual
property rights of third parties.  The defense and prosecution of
intellectual property suits, patent opposition proceedings, and related legal
and administrative proceedings can be both costly and time-consuming and may
significantly divert the efforts and resources of our technical and management
personnel.  An adverse determination in any such litigation or
proceeding to which we may become a party could subject us to significant
liability to third parties, require us to seek licenses from third parties, pay
ongoing royalties, redesign our products, or subject us to injunctions
prohibiting the manufacture and sale of our products or the use of our
technologies.  Protracted litigation could also result in our
customers or potential customers deferring or limiting their purchase or use of
our products until resolution of such litigation.





Although
we sell a substantial portion of our products outside of China, we currently
only hold patents issued in China.  Our business, results of
operations, and financial condition would be materially and adversely affected
if our sales outside China were restricted by intellectual property claims by
third parties.





We have
three issued patents and three pending patent applications in China. We do not
have, and have not applied for, any patent for our proprietary technologies
outside China, although we have sold, and expect to continue to sell, a
substantial portion of our products outside China.  Since the
protection afforded by our patents is effective only in China, others may
independently develop substantially equivalent technologies, or otherwise gain
access to our proprietary technologies, and obtain patents for such intellectual
properties in other jurisdictions, including the countries in which we sell our
products.  If any third parties are successful in obtaining patents
for technologies that are substantially equivalent or the same as the
technologies we use in our products in any of our markets before we do and
enforce their intellectual property rights against us, our ability to sell
products containing the allegedly infringing intellectual property in those
markets will be materially and adversely affected.  If we are required
to stop selling such allegedly infringing products, seek licenses and pay
royalties for the relevant intellectual properties, or redesign such products
with non-infringing technologies, our business, results of operations, and
financial condition may be materially and adversely affected.




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Problems
with product quality or product performance may cause us to incur warranty
expenses, damage our market reputation, and prevent us from achieving increased
sales and market share.





Our
products may contain defects that are not detected until after they are shipped
or are installed.  Our PV modules are typically sold with a two-year
limited product warranty for defects in materials and workmanship, and a five,
ten, and twenty-year warranty against declines of initial power generation
capacity by more than 10%, 10%, and 15%, respectively.  As a result,
we bear the risk of extensive warranty claims long after we sell our products
and recognize revenues.  We estimate and record a warranty obligation
in cost of revenue at the time revenue is recognized.  As we began
selling PV modules only since September 2005, none of our PV modules has been in
use for more than five years.  Due to the short usage history of our
products, we cannot assure you that our assumptions regarding the durability and
reliability of our products are reasonable.  Our warranty provisions
may be inadequate, and we may have to incur substantial expense to repair or
replace defective products in the future.  Any increase in the defect
rate of our products could cause us to increase the amount of our warranty
reserves and have a correspondingly negative impact on our operating
results.  Furthermore, widespread product failures may damage our
market reputation, reduce our market share, and cause our sales to
decline.





The lack or inaccessibility of
government and private sector financing for off-grid solar energy applications
could cause our sales to decline.





Our
products are used for off-grid solar energy applications in developed and
developing countries.  In some developing countries, government
agencies and the private sector have, from time to time, provided subsidies or
financing on preferred terms for rural electrification programs.  We
believe that the availability of financing could have a significant effect on
the level of sales of off-grid solar energy applications particularly in
developing countries where users may not have sufficient resources or credit to
otherwise acquire PV systems.  If existing financing programs for
off-grid solar energy applications are eliminated or if financing is
inaccessible, the growth of the market for off-grid solar energy applications
may be materially and adversely affected, which could cause our sales to
decline.  In addition, a rise in interest rates could render existing
financings more expensive and be an obstacle for potential financings that would
otherwise spur the growth of the PV industry.





Changes to existing regulations over
the utility sector and the PV industry may present technical, regulatory, and
economic barriers to the purchase and use of PV products, which may
significantly reduce demand for our products.





The
market for power generation products is heavily influenced by government
regulations and policies concerning the electric utility industry, as well as
the internal policies of electric utilities companies.  These
regulations and policies often relate to electricity pricing and technical
interconnection of end user-owned power generation.  In a number of
countries, these regulations and policies are being modified and may continue to
be modified.  End users’ purchases of alternative energy sources,
including PV products, could be deterred by these regulations and policies,
which could result in a significant reduction in the potential demand for our PV
products.  For example, utility companies commonly charge fees to
larger, industrial customers for disconnecting from the electricity transmission
grid or for having the capacity to use power from the electricity transmission
grid for back-up purposes.  These fees could increase end users’ costs
of using our PV products and make our PV products less desirable, thereby having
an adverse effect on our business, prospects, results of operations, and
financial condition.




We
anticipate that our PV products and their installation will be subject to
oversight and regulation in accordance with national and local ordinances
relating to building codes, safety, environmental protection, utility
interconnection, and metering and related matters in various
countries.  It is also burdensome to track the requirements of
individual localities and design equipment to comply with the varying
standards.  Any new government regulations or utility policies
pertaining to our PV products may result in significant additional expenses to
us, our distributors, and end users and, as a result, could cause a significant
reduction in demand for our PV products.





Fluctuations in exchange rates could
adversely affect our business.





A portion
of our sales is currently denominated in U.S. dollars with the remainder in
Renminbi and Euros, while a substantial portion of our costs and expenses is
denominated in U.S. dollars and Renminbi with the remainder in
Euros.  Therefore, fluctuations in currency exchange rates could have
a material adverse effect on our financial condition and results of
operations.  Fluctuations in exchange rates, particularly among the
U.S. dollar, Renminbi, and Euro, affect our gross and net profit margins
and could result in foreign exchange and operating losses.




We had
net foreign currency translation adjustment gains of $1,372,908 and $1,147,134
as of October 31, 2009 and October 31, 2008, respectively.  We cannot
predict the impact of future exchange rate fluctuations on our results of
operations and may incur net foreign currency losses in the
future.  We plan to reduce the effect of such exposure through hedging
arrangements, such as entering into forward exchange contracts and foreign
currency option contracts, but we cannot give assurances that such hedging
activities will be effective in managing our foreign exchange risk
exposure.




Our
financial statements are expressed in U.S. dollars, but our functional
currency is Renminbi.  The value of any investment in our stock will
be affected by the foreign exchange rate between U.S. dollars and
Renminbi.  To the extent that we hold assets denominated in
U.S. dollars, any appreciation of the Renminbi against the U.S. dollar
could result in a change to our income statement.  On the other hand,
a decline in the value of Renminbi against the U.S. dollar could reduce the
U.S. dollar equivalent amounts of our financial results, the value of any
investment in our company, and the dividends we may pay in the future, if any,
all of which could have a material adverse effect on the prices of our
stock.




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Compliance with environmental
regulations can be expensive, and noncompliance with these regulations may
result in adverse publicity and potentially significant monetary damages and
fines.





As our
manufacturing processes generate noise, wastewater, and gaseous and other
industrial wastes, we are required to comply with all national and local
regulations regarding protection of the environment. We are in compliance with
present environmental protection requirements and have all necessary
environmental permits to conduct our business.  If more stringent
regulations are adopted in the future, however, the costs of compliance with
these new regulations could be substantial.  We believe that we have
all necessary permits to conduct our business as it is presently
conducted.  If we fail to comply with present or future environmental
regulations, though, we may be required to pay substantial fines, suspend
production, or cease operations.  We use, generate, and discharge
toxic, volatile, and otherwise hazardous chemicals and wastes in our research
and development and manufacturing activities.  Any failure by us to
control the use of, or to restrict adequately the discharge of, hazardous
substances could subject us to potentially significant monetary damages and
fines or suspensions in our business operations.




We have limited insurance coverage
and may incur losses resulting from product liability claims or business
interruptions.





As with
other PV product manufacturers, we are exposed to risks associated with product
liability claims in the event that the use of the PV products we sell
results in injury or death.  Since our products are electricity
producing devices, it is possible that users could be injured or killed by our
products, whether by product malfunctions, defects, improper installation, or
other causes.  We have product liability insurance coverage on all
products shipped; there is still, however, risks that such insurance may not be
able to adequately cover all of any associated losses incurred in the event of a
successful claim against us.  The successful assertion of product
liability claims against us could result in potentially significant monetary
damages and require us to make significant payments.  Additionally,
because the insurance industry in China is in its early stages of development,
business interruption insurance, which we do not currently have, available in
China offers limited coverage compared to that offered in many other
countries.  Any business disruption or natural disaster could result
in substantial costs and diversion of resources.





Our
officers and directors own a substantial portion of our outstanding common
stock, which will enable them to influence many significant corporate actions
and in certain circumstances may prevent a change in control that would
otherwise be beneficial to our stockholders.





As of
January 4, 2010, our directors and executive officers control approximately
51.77% of our outstanding shares of stock entitled to vote.  These
stockholders, acting together, could have a substantial impact on matters
requiring the vote of the stockholders, including the election of our directors
and most of our corporate actions.  This control could delay, defer,
or prevent others from initiating a potential merger, takeover, or other change
in our control even if these actions would benefit our stockholders and
us.  This control could adversely affect the voting and other rights
of our other stockholders and could depress the market price of our common
stock.





Risks Related to Doing
Business in China





Adverse changes in political and
economic policies of the Chinese government could have a material adverse effect
on the overall economic growth of China, which could reduce the demand for our
products and materially and adversely affect our competitive position.





All of
our business operations are conducted in China and some of our sales are made in
China.  Thus, our business, financial condition, results of
operations, and prospects are affected significantly by economic, political, and
legal developments in China.  The Chinese economy differs from the
economies of most developed countries in many respects, including the amount of
government involvement, the level of development, the growth rate, the control
of foreign exchange, and the allocation or resources.





While the
Chinese economy has grown significantly in the past 20 years, the growth
has been uneven, both geographically and among various sectors of the
economy.  The Chinese government has implemented various measures
to encourage economic growth and guide the allocation of
resources.  Some of these measures benefit the overall Chinese
economy, but may also have a negative effect on the Company.  For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us.





The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy.  Although in recent years the
Chinese government has implemented measures emphasizing the utilization of
market forces for economic reform, the reduction of state ownership of
productive assets and the establishment of sound corporate governance in
business enterprises, a substantial portion of the productive assets in China is
still owned by the Chinese government.  The continued control of these
assets and other aspects of the national economy by the Chinese government
could materially and adversely affect our business.  The
Chinese government also exercises significant control over Chinese economic
growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy, and providing
preferential treatment to particular industries or companies.  Efforts
by the Chinese government to slow the pace of growth of the Chinese economy
could result in decreased capital expenditure by solar energy users, which in
turn could reduce demand for our products.




Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
renewable energy investments and expenditures in China, which in turn could lead
to a reduction in demand for our products and consequently have a material
adverse effect on our businesses.






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Uncertainties with respect to the
Chinese legal system could have a material adverse effect on us.





We
conduct substantially all of our business through our subsidiaries, some of
which are established in China.  Perfectenergy Shanghai and
Perfectenergy Solar-Tech are generally subject to laws and regulations
applicable to foreign investment in China and, in particular, laws applicable to
wholly foreign-owned enterprises.  China’s legal system is based
on written statutes.  Prior court decisions may be cited for reference
but have limited precedential value.  Since 1979,
Chinese legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in
China.  Since these laws and regulations are relatively new and
China’s legal system continues to rapidly evolve, the interpretations of many
laws, regulations, and rules are not always uniform, and enforcement of these
laws, regulations, and rules involve uncertainties, which may limit legal
protections available to us.  In addition, any litigation in China may
be protracted and result in substantial costs and diversion of resources and
management attention.





You may experience difficulties in
effecting service of legal process, enforcing foreign judgments, or bringing
original actions in China based on United States laws or other foreign laws
against us or our management.





We
conduct a substantial portion of our operations in China, and the majority of
our assets are located in China.  In addition, all of our
executive officers and most of our directors reside within
China.  As a result, it may not be possible to effect service of
process within the United States or in China against us or upon our executive
officers or directors, including with respect to matters arising under U.S.
federal securities laws or applicable state securities
laws.  Moreover, there is uncertainty that the courts of China would
enforce judgments of U.S. courts against us or our directors and officers based
on the civil liability provisions of the securities laws of the United States or
any state, or entertain an original action brought in China based upon U.S.
federal or applicable state securities laws.





We expect to rely on dividends paid
by our subsidiaries for our cash needs in the future.





We
conduct substantially all of our operations through our direct and indirect
subsidiaries, some of which were formed in the PRC.  We expect to rely
on dividends paid by Perfectenergy Shanghai, and Perfectenergy Solar-Tech for
our cash needs in the future, including the funds necessary to pay dividends and
other cash distributions to our stockholders, to service any debt we may incur,
and to pay our operating expenses.  The payment of dividends by
entities organized in China is subject to limitations.  Regulations in
China currently permit payment of dividends only out of accumulated profits as
determined in accordance with accounting standards and regulations in
China.  Our Chinese subsidiaries are also required to set aside at
least 10% of their after-tax profit based on China’s accounting standards each
year to their respective general reserves until the accumulative amount of such
reserves reach 50% of the respective company’s registered
capital.  These reserves are not distributable as cash
dividends.  Our Chinese subsidiaries are also required to allocate a
portion of their after-tax profits to their respective staff welfare and bonus
funds, which may not be distributed to equity owners except in the event of
liquidation.  In addition, if any of our Chinese subsidiaries incurs
debt on their own behalf, the instruments governing the debt may restrict their
ability to pay dividends or make other distributions to us.





Fluctuation in the value of the
Renminbi may have a material adverse effect on your investment.





The
change in value of the Renminbi against the U.S. dollar, Euro, and other
currencies is affected by, among other things, changes in China’s political and
economic conditions.  On July 21, 2005, the Chinese government
changed its decade-old policy of pegging the value of the Renminbi to the
U.S. dollar.  Under the new policy, the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies.  This change in policy has resulted in approximately 2.1%
appreciation of Renminbi against U.S. dollar.  While the
international reaction to the Renminbi revaluation has generally been positive,
there remains significant international pressure on the Chinese government to
adopt an even more flexible currency policy, which could result in a further and
more significant appreciation of the Renminbi against the
U.S. dollar.  As a portion of our costs and expenses is
denominated in Renminbi, the revaluation in July 2005 and potential future
revaluation has and could further increase our costs.  In addition, as
we expect to rely on dividends paid to us by our operating Chinese subsidiaries,
any significant revaluation of the Renminbi may have a material adverse effect
on our revenues and financial condition, and the value of, and any of our
dividends payable on our ordinary shares in foreign currency
terms.  For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the Renminbi amount
we receive from the conversion.  Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our ordinary shares or for other business purposes, appreciation of
the U.S. dollar against the Renminbi would have a negative effect on the
U.S. dollar amount available to us.




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Restrictions on currency exchange may
limit our ability to receive and use our revenues effectively.





Certain
portions of our revenues and expenses are denominated in Renminbi.  If
our revenues denominated in Renminbi increase or expenses denominated in
Renminbi decrease in the future, we may need to convert a portion of our
revenues into other currencies to meet our foreign currency obligations,
including, among others, payment of dividends declared, if any, in respect of
our ordinary shares.  Under China’s existing foreign exchange
regulations, our Chinese subsidiary, Perfectenergy Shanghai, is able to pay
dividends in foreign currencies, without prior approval from the State
Administration of Foreign Exchange (SAFE) by complying with certain procedural
requirements.  We cannot, however, make assurances that the Chinese
government will not take further measures in the future to restrict access to
foreign currencies for current account transactions.




Foreign
exchange transactions by Perfectenergy Shanghai and Perfectenergy Solar-Tech
under the capital account continue to be subject to significant foreign exchange
controls and require the approval of China’s governmental authorities, including
SAFE.  In particular, if either subsidiary borrows foreign currency
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance either subsidiary by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities including the Ministry of Commerce or its local
counterparts.  These limitations could affect the ability of
Perfectenergy Shanghai or Perfectenergy Solar-Tech to obtain foreign exchange
through debt or equity financing.





Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us, or otherwise materially adversely affect
us.





In
October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the
Foreign Exchange Control over Financing and Return Investment Through Special
Purpose Companies by Residents Inside China, or the SAFE Notice, which requires
PRC residents to register with the competent local SAFE branch before using
onshore assets or equity interests held by them to establish offshore special
purpose companies (“SPVs”), for the purpose of overseas equity
financing.  Under the SAFE Notice, such PRC residents must also file
amendments to their registration in connection with any increase or decrease of
capital, transfer of shares, mergers and acquisitions, equity investment, or
creation of any security interest in any assets located in China to guarantee
offshore obligations.  Moreover, if the SPVs were established and
owned the onshore assets or equity interests before the implementation date of
the SAFE Notice, a retroactive SAFE registration is required to have been
completed before March 31, 2006.  If any PRC resident stockholder of
any SPV fails to make the required SAFE registration and amended registration,
the PRC subsidiaries of that SPV may be prohibited from distributing their
profits and the proceeds from any reduction in capital, share transfer, or
liquidation to the SPV.  Failure to comply with the SAFE registration
and amendment requirements described above could also result in liability under
PRC laws for evasion of applicable foreign exchange restrictions.





Because
of uncertainty over how the SAFE Notice will be interpreted and implemented, and
how or whether SAFE will apply it to us, we cannot predict how it will affect
our business operations or future strategies.  For example, our
present and prospective PRC subsidiaries’ ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with the SAFE Notice by our PRC
resident beneficial holders.  In addition, such PRC residents may not
always be able to complete the necessary registration procedures required by the
SAFE Notice.  We also have little control over either our present or
prospective direct or indirect stockholders or the outcome of such registration
procedures.  A failure by our PRC resident beneficial holders or
future PRC resident stockholders to comply with the SAFE Notice, if SAFE
requires it, could subject these PRC resident beneficial holders to fines or
legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiaries’ ability to make distributions or pay dividends, or
affect our ownership structure, which could adversely affect our business and
prospects.





Our business benefits from certain
Chinese government incentives.  Expiration of, or changes to, these
incentives could have a material adverse effect on our financial condition and
operating results.





The
Chinese government has provided various incentives to high-technology companies,
including Perfectenergy Shanghai, in order to encourage development of the
high-technology industry.  Such incentives include reduced tax rates
and other measures.  For example, Perfectenergy Shanghai, which is
registered and operating in a high-tech zone in Shanghai, has been qualified as
a “high or new technology enterprise.”  As a result, it is entitled to
a preferential enterprise income tax rate of 15% so long as it continues to
operate in the high-tech zone and maintains its “high or new technology
enterprise” status.  We were entitled to a two-year exemption from the
enterprise income tax for our first two profitable years of operation, which
were 2005 and 2006.  In 2007, we were entitled to a 50% deduction of
the income tax rate of 33%, which is a rate of 18%. For 2008 and 2009, we are
entitled to a 50% deduction of the income tax rate of 25%, which is a rate of
12.5%.  When the currently applicable tax benefit expires, our
effective tax rate may, however, increase.





On
January 1, 2008, a new Enterprise Income Tax (“EIT”) law replaced the old laws
for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).  The key changes were: (a) the new standard EIT rate of 25%
replaced the 33% rate previously applicable to both DES and FIEs, except for
high-tech companies, which pay a reduced rate of 15%; and (b) companies
established before March 16, 2007 continue to enjoy tax holiday treatment
approved by local government for a grace period of 5 years or until the tax
holiday term is completed, whichever is sooner.  These companies will
pay the standard tax rate as defined in point “a” above during the grace
period.  Since Perfectenergy Shanghai was established before March 16,
2007, we are qualified for the 12.5% tax rate as described
above.  Perfectenergy Shanghai was granted “high-tech company” status
by the government, and a 15% tax rate starting January 1, 2010 will be
applicable to us after the tax holiday term.  Perfectenergy Solar-Tech
was established in February 2008, and, thus, is subject to a 25% tax rate before
the “high-tech company” status is provided. Any increase to our EIT rate could
have a material adverse effect on our financial condition and results of
operations.




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We
may be unable to complete a business combination transaction efficiently or on
favorable terms due to complicated merger and acquisition regulations in the PRC
that became effective on September 8, 2006.





On August
8, 2006, six PRC regulatory agencies, including the China Securities Regulatory
Commission or CSRC, promulgated the Regulation on Mergers and Acquisitions of
Domestic Companies by Foreign Investors, which became effective on September 8,
2006.  This new regulation, among other things, governs the approval
process by which a PRC company may participate in an acquisition of assets or
equity interests.  Depending on the structure of the transaction, the
new regulation will require the PRC parties to make a series of applications and
supplemental applications to the government agencies.  In some
instances, the application process may require the presentation of economic data
concerning a transaction, including appraisals of the target business and
evaluations of the acquirer that are designed to allow the government to assess
the transaction.  Government approvals will have expiration dates by
which a transaction must be completed and reported to the government
agencies.  Compliance with the new regulations is likely to be more
time consuming and expensive than in the past, and the government can now exert
more control over the combination of two businesses.  Accordingly, due
to the new regulation, our ability to engage in business combination
transactions has become significantly more complicated, time consuming, and
expensive, and we may not be able to negotiate a transaction that is acceptable
to our stockholders or sufficiently protect their interests in a
transaction.





Additionally,
we may seek to structure transactions in a manner that avoids the need to make
applications or a series of applications with Chinese regulatory authorities
under these new M&A regulations.  If we fail to effectively
structure an acquisition in a manner that avoids the need for such applications
or if the Chinese government interprets the requirements of the new M&A
regulations in a manner different from our understanding of such regulations,
then acquisitions that we have effected may be unwound or subject to
rescission.  Also, if the Chinese government determines that our
structure of any of our acquisitions does not comply with these new regulations,
then we may also be subject to fines and penalties.





Risks Relating to Ownership
of Our Securities





Our
common stock is quoted on the Over-the-Counter Bulletin Board, a quotation
system, and is not traded on an issuer listing service, market, or exchange.
Thus, it may be difficult for you to sell your common stock or you may not be
able to sell your common stock for an optimum trading price.





Our common stock is quoted on the OTC
Bulletin Board under the symbol “PFGY.”  The OTC Bulletin Board is a
regulated quotation service that displays real-time quotes, last sale prices,
and volume limitations in over-the-counter securities.  Because trades and quotations on the
OTC Bulletin Board involve a manual process, market information for such
securities cannot be guaranteed.  In addition, quote information, or
even firm quotes, may not be available.  The manual execution process
may delay order processing, and intervening price fluctuations may result in the
failure of a limit order to execute or the execution of a market order at a
significantly different price.  Execution of trades, execution
reporting, and the delivery of legal trade confirmations may be delayed
significantly.  Consequently, one may not be able to sell shares of
our common stock at the optimum trading prices.





When
fewer shares of a security are traded on the OTC Bulletin Board, price
volatility may increase and price movement may outpace the ability to deliver
accurate quote information. Lower trading volumes in a security may result in a
lower likelihood of an individual’s orders being executed, and current prices
may differ significantly from the price one was quoted by the OTC Bulletin Board
at the time of the order entry.





Orders
for OTC Bulletin Board securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at the
optimum trading prices.





The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a bid
price for securities bought and sold through the OTC Bulletin
Board.





Due to
the foregoing, demand for securities that are traded through the OTC Bulletin
Board, such as our common stock, may be decreased or eliminated.




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We
are subject to the penny stock rules, and these rules may adversely affect
trading in our common stock.




Our
common stock is a “low-priced” security under rules promulgated under the
Securities Exchange Act of 1934.  In accordance with these rules,
broker-dealers participating in transactions in low-priced securities must first
deliver a risk disclosure document that describes the risks associated with such
stocks, the broker-dealer’s duties in selling the stock, the customer’s rights
and remedies, and certain market and other information.  Furthermore,
the broker-dealer must make a suitability determination approving the customer
for low-priced stock transactions based on the customer’s financial situation,
investment experience, and objectives.  Broker-dealers must also
disclose these restrictions in writing to the customer, obtain specific written
consent from the customer, and provide monthly account statements to the
customer.  The effect of these restrictions may decrease the
willingness of broker-dealers to make a market in our common stock, decrease
liquidity of our common stock, and increase transaction costs for sales and
purchases of our common stock as compared to other securities.




Our
stock price may be volatile, which may result in losses to our
stockholders.




The stock
markets have experienced significant price and trading volume fluctuations over
the past year, and the market prices of issuers quoted on the Over-The-Counter
Bulletin Board, the quotation service for our common stock, generally have been
very volatile and have experienced sharp share price and trading volume
changes.  The trading price of our common stock could fluctuate widely
in response to many of the following factors, some of which are beyond our
control:





·
            variations
      in our operating results;·
            announcements
      of technological innovations, new services, or product lines by us or our
      competitors;·
            changes
      in expectations of our future financial performance, including financial
      estimates by securities analysts and investors;·
            changes
      in operating and stock price performance of other companies in our
      industry;·
            additions
      or departures of key personnel; and·
            future
      sales of our common stock.




We
incur increased costs and compliance risks as a result of becoming a public
company.





As a
public company, we incur significant legal, accounting, and other expenses that
Perfectenergy BVI did not incur as a private company prior to the share exchange
transaction between the Company and Perfectenergy BVI that closed on August 8,
2007.  We incur costs associated with our public company reporting
requirements and costs associated with corporate governance requirements,
including certain requirements under the Sarbanes-Oxley Act of 2002 and rules
implemented by the SEC and the Financial Industry Regulatory
Authority.  Complying with these requirements is time-consuming and
costly.  Like many smaller public companies, we face a significant
impact from required compliance with Section 404 of the Sarbanes-Oxley Act of
2002.  Section 404 requires management of public companies to evaluate
the effectiveness of internal control over financial reporting and the
independent auditors to attest to the effectiveness of such internal controls
and the evaluation performed by management.  The SEC has adopted rules
implementing Section 404 for public companies as well as disclosure
requirements.  The Public Company Accounting Oversight Board has
adopted documentation and attestation standards that the independent auditors
must follow in conducting its attestation under Section 404.  There
can be no assurance that we will be able to effectively meet all of the
requirements of Section 404 as currently known to us in the currently mandated
timeframe.  Any failure to implement effectively new or improved
internal controls, or to resolve difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet
reporting obligations, or result in management being required to give a
qualified assessment of our internal controls over financial reporting or our
independent auditors providing an adverse opinion regarding management’s
assessment.  Any such result could cause investors to lose confidence
in our reported financial information, which could have a material adverse
effect on our stock price.





If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price
to decrease substantially.





Since,
prior to the Share Exchange, Perfectenergy BVI operated as a private company
without public reporting obligations, Perfectenergy BVI has committed limited
personnel and resources to the development of the external reporting and
compliance obligations that are required of a public
company.  Recently, we have taken measures to address and improve our
financial reporting and compliance capabilities, and we are in the process of
instituting changes to satisfy our obligations in connection with joining a
public company, when and as such requirements become applicable to
us.  Prior to taking these measures, we did not believe we had the
resources and capabilities to do so.  We plan to obtain additional
financial and accounting resources to support and enhance our ability to meet
the requirements of being a public company.  We will need to continue
to improve our financial and managerial controls, reporting systems and
procedures, and documentation thereof.  If our financial and
managerial controls, reporting systems, or procedures fail, we may be unable to
provide accurate financial statements on a timely basis or comply with the
Sarbanes-Oxley Act of 2002 as it applies to us.  Any failure of our
internal controls or our ability to provide accurate financial statements could
cause the trading price of our common stock to decrease
substantially.




We
do not anticipate paying any cash dividends.


We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future.  The payment of dividends, if any,
would be contingent upon our revenues and earnings, if any, capital
requirements, and general financial condition.  The payment of any
dividend is within the discretion of our Board of Directors.  We
presently intend to retain all earnings, if any, to implement our business plan;
accordingly, we do not anticipate the declaration of any dividends in the
foreseeable future.


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ITEM 2.  PROPERTIES.





Offices
and Facilities





The table
below provides a general description of our offices and facilities:




Location
            
            Principal Activities
            
            Area (sq. meters)
            
            Lease Expiration DateNo.
      479 You Dong Road, Xinzhuang Town, Shanghai, People’s Republic
      of China 201100
            
            Company
      headquarters;
              manufacturing
      facility
            
            6,200
            
            May
      31, 2011Tannenweg
      8-10, 53757 Sankt Augustin,
              Germany
            
            European
      sales and marketing office
            
            274
            
            November
      2010569
      Zhuan Sheng Road, Shanghai, People’s Republic of China
      201100
            
            Perfectenergy
      Solar-Tech production facility
            
            1,943
            
            March
      2010





We lease
the space for our headquarters and factory premises under a property lease
agreement that expires on May 31, 2011, with an option to renew the
lease.  We lease the space for our sales and marketing office in
Germany under a property lease agreement that expires in November
2010.  The additional production facility used by Perfectenergy
Solar-Tech is leased under a property lease agreement that expires in March
2010.  At October 31, 2009, minimum future commitments under the lease
agreements were as follows:




Year
      Ended October 31,
            
            Amount2010
            
            $
            264,5612011
            
            $
            120,727Thereafter
            
            $
            ―








ITEM 3.  LEGAL PROCEEDINGS.




We know
of no material, existing or pending legal proceedings against us, nor are we
involved as a plaintiff in any material proceeding or pending
litigation.  To the best of our knowledge, there are no proceedings in
which any of our directors, officers, or affiliates, or any registered or
beneficial holder of more than 5% of our voting securities, or any associate of
such persons, is an adverse party or has a material interest adverse to the
Company.






ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.




There
were no matters submitted during the fourth quarter of the fiscal year covered
by this report to a vote of our security holders.





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PART
II




ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.




Market
Information





Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
“PFGY.”  The following table sets forth, for the periods indicated,
the reported high and low closing bid quotations for our common stock as
reported on the OTC Bulletin Board for each quarterly period within our two most
recent fiscal years.  The bid prices reflect inter-dealer quotations,
do not include retail markups, markdowns, or commissions, and do not necessarily
reflect actual transactions.





Common
Stock





Quarter
      Ended
            
            High
      Bid
            
            
            Low
      BidOctober
      31, 2009
            
            $
            0.42
            
            
            $
            0.19July
      31, 2009
            
            $
            0.42
            
            
            $
            0.20April
      30, 2009
            
            $
            0.45
            
            
            $
            0.19January
      31, 2009
            
            $
            0.80
            
            
            $
            0.11October
      31, 2008
            
            $
            1.85
            
            
            $
            0.28July
      31, 2008
            
            $
            2.85
            
            
            $
            1.35April
      30, 2008 (1)
            
            $
            5.20
            
            
            $
            2.04January
      31, 2008 (1)
            
            $
            7.96
            
            
            $
            5.00





(1)
            We
      effected a 4-for-1 reverse stock split on March 24, 2008, and the high and
      low bid information in the table for the quarter ended January 31, 2008
      and the period February 1, 2008 to March 24, 2008 reflects the reverse
      split.




As of
January 26, 2010, the closing sales price for shares of our common stock was
$0.402 per share on the OTC Bulletin Board.





Holders





As of
January 4, 2010, we have 24 stockholders of record of our issued and outstanding
common stock based upon a shareholder list provided by our transfer
agent.  Our transfer agent is Holladay Stock Transfer, Inc. located at
2939 North 67th Place, Suite C, Scottsdale, Arizona 85251, and their telephone
number is (480) 481-3940.




Dividend
Policy




We do not
currently intend to pay any cash dividends in the foreseeable future on our
common stock and, instead, intend to retain earnings, if any, for
operations.  Any decision to declare and pay dividends in the future
will be made at the discretion of our board of directors and will depend on,
among other things, our results of operations, cash requirements, financial
condition, contractual restrictions, and other factors that our board of
directors may deem relevant.





Securities
Authorized for Issuance under Equity Compensation Plans





The
following table sets forth, as of October 31, 2009, certain information related
to our compensation plans under which shares of our common stock are authorized
for issuance.





Plan
      Category
            
            COLUMN
      A:
              Number of Securities
              to be Issued upon
              Exercise of
              Outstanding Options
              Warrants and Rights
            
            
            Weighted-Average Exercise
              Price of Outstanding
              Options, Warrants and
              Rights
            
            
            Number of Securities
              Remaining Available
              For Future Issuance
              Under Equity
              Compensation Plans
              (Excluding Securities
              Reflected in COLUMN
      A)Equity
      compensation plans approved by security holders
            
            
            1,218,060
            (1)
            
            $
            2.93
            
            
            
            281,940
            (2)Equity
      compensation plans not approved by security holders
            
            
            ―
            
            
            
            ―
            
            
            
            ―Total
            
            
            1,218,060
            
            
            $
            $2.93
            
            
            
            281,940





(1)
            Includes
      outstanding options granted pursuant to the Company’s 2007 Stock Incentive
      Plan.(2)
            Includes
      shares remaining available for future issuance under the Company’s 2007
      Stock Incentive Plan.






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On
September 5, 2007, our board of directors approved the 2007 Stock Incentive Plan
(the “Plan”), which was also approved by a majority of our shareholders at our
annual shareholder meeting held on September 2, 2008.  All of our
employees, officers, and directors, and those of our consultants and advisors
who (i) are natural persons and (ii) provide bona fide services to the Company
not connected to a capital raising transaction or the promotion or creation of a
market for our securities are eligible to be granted options or restricted stock
awards (each, an “Award”) under the Plan.  The Plan is administered by
our board, and the board establishes certain terms of option awards, including
the exercise price and duration, in the applicable option
agreement.  Awards may be made under the Plan for up to 1,500,000
shares of our common stock, and the maximum number of shares of common stock
with respect to which Awards may be granted to any participant under the Plan is
500,000 shares of common stock.  The Plan allows for adjustments for
changes in common stock and certain other events, including, but not limited to,
any stock split, reverse stock split, stock dividend, recapitalization,
combination of shares, reclassification of shares, spin-off, any distribution to
holders of common stock other than a normal cash dividend, and liquidation or
dissolution.





Recent
Sales of Unregistered Securities




None.







ITEM 6.  SELECTED FINANCIAL DATA.





Not
applicable.







ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.





The
following discussion and analysis of the results of operations and financial
condition of Perfectenergy International Limited for the fiscal years ending
October 31, 2009 and 2008 should be read in conjunction with our financial
statements and the notes to those financial statements that are included
elsewhere in this report.  Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations, and intentions.  Actual
results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors,
including those set forth under the Risk Factors, Cautionary Statement Regarding
Forward-Looking Information, and Business sections in this report.  We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.





OVERVIEW





We were
originally incorporated on February 25, 2005 in the State of Nevada under our
former name “Crestview Development Corporation.”  As a result of a
share exchange transaction that closed on August 8, 2007, our business is the
research, development, manufacturing, and sale of solar cells, solar modules,
and photovoltaic (“PV”) systems through our direct and indirect wholly owned
subsidiaries.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





This
discussion and analysis are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States.  The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported net sales and expenses during the reporting periods.  On an
ongoing basis, we evaluate our estimates and assumptions.  We base our
estimates on historical experience and on various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources.  Actual results may differ from
these estimates under different assumptions or conditions.




Inventories





Inventories
are stated at the lower of cost or market, using a weighted average cost method.
We regularly review inventory quantities on hand and record any inventory
believed to be impaired down to its net realizable value. If actual demand or
market conditions are less favorable than projected demand, additional inventory
write-downs may be required that could adversely impact financial results for
the period in which the additional excess or obsolete inventory is
identified.




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Inventories
constitute a majority of our current assets as reflected in our balance sheets
as of October 31, 2009 and 2008. The manner in which we estimate the value of
our inventories is a significant component in determining the carrying value of
our inventories.





We
estimate the amount of the excess inventories by comparing inventory on hand
with the estimated sales that can be sold within our operating cycle. To
estimate the amount of obsolete inventories, we analyze movement of our
products, monitor competing technology and evaluate acceptance of our
products in the marketplace. Based on this information, we estimate inventories
that cannot be sold at all or can only be sold at deeply discounted
prices.





We
determine the market value of our inventory by assessing current market prices
as of the reporting date. If the market value is higher than our purchase price,
we report the amount of the inventories at the original purchase price, and if
the market value is lower than our purchase price, then we write-off the
difference between our purchase price and the market value to the net realizable
value.





Revenue
Recognition





The
Company's revenue recognition policies are in accordance with the FASB’s
accounting standard.  Revenues from solar cells, solar modules, and PV
systems are recognized upon shipment of the products only if no significant
Company obligations remain, the fee is fixed or determinable, and collection is
received or the resulting receivable is deemed probable.  Revenue is
recognized, net of discount and allowances, at the time of product
shipment.  All of the Company’s products that are sold in the PRC are
subject to a Chinese value-added tax at a rate of 17% of the gross sales price
or at a rate approved by the PRC local government.  All of the
Company’s products that are sold in Germany are subject to a Germany value-added
tax at a rate of 19% of the gross sales price or at a rate approved by the
Germany government.  In general, the Company does not accept product
returns; only under special situations, when both the Company and customers
agree, is a product exchange allowed.  Historically, the Company has
not experienced any product returns.  For solar cells, solar modules,
and PV systems, the Company is covered by product quality insurance and product
liability insurance.  The product quality insurance retroactively
covers the period from July 1, 2007 to the end of the insurance period on June
30, 2010.  As such, the Company does not need maintain a provision for
potential warranty cost.





Financial
Instruments





The
accounting standards regarding fair value of financial instruments and related
fair value measurements define financial instruments, define fair value,
establish a three-level valuation hierarchy for disclosures of fair value
measurement, and enhance disclosure requirements for fair value measures. The
carrying amounts reported in the consolidated balance sheets for receivables and
payables qualify as financial instruments and reflect reasonable estimates of
fair value because of the short period of time between the origination of such
instruments and their expected realization.  The three levels are
defined as follow:





·
            Level
      1 inputs to the valuation methodology which are quoted prices (unadjusted)
      for identical assets or liabilities in active
  markets.





·
            Level
      2 inputs to the valuation methodology that includes quoted prices for
      similar assets and liabilities in active markets, and inputs that are
      observable for the asset or liability, either directly or indirectly,
      substantially for the full term of the financial
    instrument.





·
            Level
      3 inputs to the valuation methodology which are unobservable and
      significant to the fair value
measurement.





Research
and Development





Research
and development expenses are expensed as incurred.  Research and
development expenses include salaries, consultant fees, supplies and materials,
as well as costs related to other overhead such as facilities, utilities, and
other departmental expenses.  The costs the Company incurs with
respect to internally developed technology and engineering services are included
in research and development expenses.





Recently
Issued Accounting Standards





In
January 2009, the FASB issued an accounting standard related to Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets.  The accounting standard removes its
exclusive reliance on “market participant” estimates of future cash flows used
in determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred.  The adoption of the
accounting standard did not have a material impact on our consolidated financial
statements because all of our investments in debt securities are classified as
trading securities.




- 24
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In April
2009, the FASB issued an accounting standard that makes the other-than-temporary
impairments guidance more operational and improves the presentation of
other-than-temporary impairments in the financial statements. This standard
replaced the existing requirement that the entity’s management assert it has
both the intent and ability to hold an impaired debt security until
recovery with a requirement that management assert it does not have the intent
to sell the security, and it is more likely than not it will not have to sell
the security before recovery of its cost basis. This standard provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. The adoption of these FASB Staff
Positions did not have a material impact the Company’s consolidated financial
statements.





In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The Company adopted this accounting
standard, but it did not have a material impact on the disclosures related to
its consolidated financial statements.





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009, and the Company does not expect this
standard to have a material effect on its consolidated financial
statements.





In June
2009, the FASB issued an accounting standard modifies how a company determines
when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. It clarifies that the
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. The accounting standard requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. It also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. The accounting standard is effective for
fiscal years beginning after November 15, 2009. The Company is currently
assessing the impact of the standard on its consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles.” This standard
replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles,” and establishes two levels of GAAP, authoritative and
non-authoritative. The FASB Accounting Standards Codification (the
“Codification” or ASC) will become the source of authoritative, nongovernmental
GAAP, except for rules and interpretive releases of the Securities and Exchange
Commission (“SEC”), which are sources of authoritative GAAP for SEC
registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification will become non-authoritative. The Company adopted
the codification standards which do not have a financial impact other than
references to authoritative literature incorporated herein.





In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. This update is effective for our first quarter 2010. The Company is
currently evaluating the impact of this ASU on its consolidated financial
statements.





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.




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RESULTS
OF OPERATIONS





The
following table sets forth the results of our operations for the fiscal years
ended October 31, 2009 and 2008.





Fiscal
      Year Ended
              October
      31, 2009
            
            
            % of
              Revenues
            
            
            Fiscal
      Year Ended
              October
      31, 2008
            
            
            % of
              RevenuesREVENUES
            
            $
            31,454,956
            
            
            
            100.0
            %
            
            $
            63,660,023
            
            
            
            100.0
            %COST
      OF REVENUES
            
            
            30,346,831
            
            
            
            96.5
            %
            
            
            60,973,113
            
            
            
            95.8
            %GROSS
      PROFIT
            
            
            1,108,125
            
            
            
            3.5
            %
            
            
            2,686,910
            
            
            
            4.2
            %SELLING,
      GENERAL, AND ADMINISTRATIVE EXPENSES
            
            
            7,683,195
            
            
            
            24.4
            %
            
            
            6,256,817
            
            
            
            9.8
            %INCOME
      (LOSS) FROM OPERATIONS
            
            
            (6,575,070
            )
            
            
            (20.9
            )%
            
            
            (3,569,907
            )
            
            
            (5.6
            )%OTHER
      EXPENSES (INCOME), NET
            
            
            553,537
            
            
            
            (1.8
            )%
            
            
            (11,714,749
            )
            
            
            (18.4
            )%INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
            
            
            (6,021,533
            )
            
            
            (19.1
            )%
            
            
            8,144,842
            
            
            
            12.8
            %PROVISION
      (BENEFIT)FOR INCOME TAXES
            
            
            (337,198
            )
            
            
            (1.1
            )%
            
            
            63,652
            
            
            
            0.1
            %NET
      INCOME (LOSS)
            
            
            (5,684,335
            )
            
            
            (18.1
            )%
            
            
            8,081,190
            
            
            
            12.7
            %OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
            
            
            225,774
            
            
            
            0.7
            %
            
            
            954,668
            
            
            
            1.5
            %COMPREHENSIVE
      INCOME
            
            
            (5,458,561
            )
            
            
            (17.4
            )%
            
            
            9,035,858
            
            
            
            14.2
            %





REVENUES.  During the
fiscal year ended October 31, 2009, we had revenues of $31.5 million as compared
to revenues of $63.7 million during the fiscal year ended October 31, 2008, a
decrease of approximately 50.6%.  The decrease in revenues is
attributable to a 50% drop in our sales price of solar module products as a
result of fierce competition in the current market.  Despite such
falling sales prices, shipments of module products continued to increase as a
result of some market recovery, reaching about 70% of the amount of shipments
from that in 2008.




COST OF REVENUES.  Cost
of revenues for the fiscal year ended October 31, 2009 was $30.3 million as
compared to $61.0 million for the fiscal year ended October 31, 2008, a decrease
of approximately 50.2%.   The decrease in revenue costs is mainly
in line with the declines in our sales and also explainable by a 60% decline in
the cost of silicon wafers.





GROSS PROFIT.  Our gross
profit for the fiscal year ended October 31, 2009 was $1.1 million as compared
to a gross profit of $2.7 million for the fiscal year ended October 31, 2008,
representing gross margins of approximately 3.5 % and 4.2%,
respectively.  The decrease in gross profits was mainly due to the
decline in the sales price of silicon wafers despite cost savings measures taken
in our production process.  The impact of the high historical price of
silicon wafers was fully absorbed in the first few quarters during the
year.




SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES.  Selling, general, and administrative expenses totaled
$7.7 million for the fiscal year ended October 31, 2009 as compared to $6.3
million for the fiscal year ended October 31, 2008, an increase of approximately
22.8%.  The increase is attributable to a $1.9 million provision
recorded as allowance for a refundable prepayment to a silicon supplier in
Germany in the third quarter of fiscal year 2009.  Actual spending on
administrative expenses was reduced by 10% as a result of our continued efforts
with cost control initiatives.





OTHER EXPENSES (INCOME).
Other income for the fiscal year ended October 31, 2009 consisted of
non-operating income, interest income, and change in fair value of derivative
instruments.  We had other expenses of $0.6 million for the fiscal
year ended October 31, 2009 as compared to other expenses of $11.7 million for
the fiscal year ended October 31, 2008.  The decrease in other income
was mainly due to lesser gain on change in the fair value of our
warrants.





NET INCOME (LOSS).  We had net loss of
$5.7 million for the fiscal year ended October 31, 2009 as compared to net
income of $8.1 million for the fiscal year ended October 31,
2008.  The decrease in net income is primarily attributable to the
lesser gain on change in the fair value of our warrants in fiscal year 2009
compared to fiscal year 2008 and a $1.9 million provision recorded as allowance
for a prepayment to a supplier to be refunded during the third quarter of
2009.




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LIQUIDITY





Cash
Flows





Net cash
provided by operating activities was $1.8 million for the fiscal year ended
October 31, 2009, while net cash used in operating activities was $2.6
million for the fiscal year ended October 31, 2008.  The increase in
net cash flow from operating activities was mainly due to better control of
our working capital and changing credit structure in the solar products
industry, which includes a decrease in prepayments and an increase in accounts
payable.  This increase was slightly offset by a decrease in cash
received as customer deposits.





Net cash
used in investing activities was $0.4 million for the fiscal year ended
October 31, 2009, while net cash used in investing activities was $5.3
million for the fiscal year ended October 31, 2008.  The increase in
net cash flow from investing activities was due to reduced spending on equipment
after the completion of our production capacity expansion to 60MW since October
2008.





There
were no financing activities during our most recent fiscal
year.  During the fiscal year ended December 31, 2008, net cash
provided by financing activities was $26,250.




Material
Impact of Known Events on Liquidity





In
October 2007, we entered into an Investment Agreement with Shanghai Zizhu
Science Park Development Co., Ltd. (“Science Park”), under which we planned to
construct a new solar cell production facility on certain land in the Shanghai
Zizhu Science-Based Industrial District of Shanghai, China, allowing us to
expand our lamination lines and our cell production lines to 200MW of total new
production capacity.  As required by the Investment Agreement, on
February 28, 2008, we formed Perfectenergy Solar-Tech under PRC laws as a wholly
owned subsidiary of Perfectenergy BVI.  Perfectenergy BVI is required
to contribute $20,000,000 to the registered capital of Perfectenergy Solar-Tech,
of which $4,000,000 has been contributed with the remaining $16,000,000 to be
contributed by February 28, 2010.  Perfectenergy Solar-Tech obtained
the land use rights from Science Park, for which Perfectenergy Solar-Tech is to
pay the local PRC land bureau approximately $2.71 million.  We paid
$0.28 million of the $2.71 million during the fiscal year ended October 31, 2008
and made no additional payments since then.  Due to supplementary land
use restrictions, we submitted an application to the local PRC land bureau to
cancel the project and requested a refund of our advanced payment of $0.28
million for the land.  In early December 2009, we received a refund of
the entire advanced payment with approval from the local PRC land bureau to
cancel the Investment Agreement.  We are currently reviewing our
options with regards to the Investment Agreement.  We are also
reviewing our expansion plans with existing working capital and may apply for
further changes in Perfectenergy Solar-Tech’s capital
commitment.  These potential expenditures will not materially impact
our short-term liquidity, but they are reasonably likely to have a material
impact on our long-term liquidity if we fail to raise additional equity
capital.




CAPITAL
RESOURCES





We have
financed our operations primarily with cash flows from operations and net
proceeds of $15.99 million from a private placement financing transaction that
closed in August 2007.  Thus, we believe that our current cash and
cash equivalents, anticipated cash flow from operations, and net proceeds from
the private placement financing will be sufficient to meet our anticipated cash
needs, including our cash needs for working capital and capital expenditures for
at least the next 8 months.  The proceeds from the private placement
financing will continue to be used for general working capital purposes,
including funding the purchase of additional equipment for the solar energy
product production lines, advertising and marketing expenses, research and
development, and the purchase of silicon that we need for
our operations.  We cannot, however, provide assurances that the
proceeds raised in the August 2007 financing will be sufficient for the planned
expansion of our operations.  Further, we may require additional cash
due to changes in business conditions or other future developments, including
any investments or acquisitions we may decide to pursue.  To the
extent it becomes necessary to raise additional cash in the future, we may seek
to raise it through the sale of debt or equity securities, funding from
joint-venture or strategic partners, debt financing or loans, issuance of common
stock, or a combination of the foregoing.  We currently do not have
any binding commitments for, or readily available sources of, additional
financing.  We cannot provide any assurances that we will be able to
secure the additional cash or working capital we may require to continue our
operations, either now or in the future.





OFF-BALANCE
SHEET ARRANGEMENTS





We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties.  We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholder’s equity or that are not reflected in our consolidated
financial statements.  Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity, or market risk support to such
entity.  We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk, or credit support to us
or engages in leasing, hedging, or research and development services with
us.




- 27
-
 Table of Contents





CONTRACTUAL
OBLIGATIONS





We have
certain fixed contractual obligations and commitments that include future
estimated payments.  Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates.  We cannot provide certainty
regarding the timing and amounts of payments.  We present in the table
below a summary of the most significant assumptions used in our determination of
amounts in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.





The
following table summarizes our contractual obligations as of October 31, 2009,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods.





Payments Due by PeriodTotal
            
            
            Less than 1 year
            
            
            1-3 Years
            
            
            3-5 Years
            
            
            5 Years +In
      ThousandsContractual
      Obligations:Bank
      Indebtedness
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Other
      Indebtedness
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Capital
      Lease Obligations
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Operating
      Leases (1)
            
            $
            385
            
            
            $
            264
            
            
            $
            121
            
            
            $
            —
            
            
            $
            —Purchase
      of Land Use Rights
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Purchase
      Obligations (2)
            
            $
            27,006
            
            
            $
            8,360
            
            
            $
            18,646
            
            
            $
            —
            
            
            $
            —Total
      Contractual Obligations:
            
            $
            27,391
            
            
            $
            8,624
            
            
            $
            18,767
            
            
            $
            —
            
            
            $
            —





(1)
            Operating
      lease amounts include the lease for our main office and manufacturing
      facility.  All leases are on a fixed repayment
      basis.  None of the leases includes contingent
      rentals.


(2)
            Purchase
      obligations consist of obligations under our silicon wafers supply
      purchase contracts.  The amounts disclosed are actual
      obligations and estimated future obligations that we have with Tianjin
      Huan-ou.  For more information on these purchase contracts,
      please see the descriptions above under the section titled
      “Business.”




ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.




Not
applicable.







ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.





Our
consolidated financial statements for the fiscal years ended October 31, 2009
and 2008 begin on the following page, starting with page F-1.






- 28
-
 Table of Contents




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Stockholders of


Perfectenergy
International Ltd. and subsidiaries




We have
audited the accompanying consolidated balance sheets of Perfectenergy
International Ltd. and subsidiaries as of October 31, 2009 and 2008 and the
related consolidated statements of operations and other comprehensive income
(loss), shareholders’ equity, and cash flows for each of the years in the
two-year period ended October 31, 2009.  Perfectenergy International
Ltd’s management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Perfectenergy International
Ltd. and subsidiaries as of October 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the years in the two-year period ended
October 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.








/s/  Frazer
Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and Torbet, LLP, see
Form 8-K filed on January 7, 2010)




Brea,
California


January
29, 2010




F-1
 Table of Contents




PERFECTENERGY
      INTERNATIONAL LTD. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAS
      OF OCTOBER 31, 2009 AND 2008




ASSETS2009
            
            
            2008CURRENT
      ASSETS:Cash
            
            $
            3,582,854
            
            
            $
            2,022,052Accounts
      receivable
            
            
            3,744,299
            
            
            
            3,880,053Other
      receivables, net of allowance for doubtful accounts of $1,861,097 and
      $0as
      of October 31, 2009 and 2008, respectively.
            
            
            4,148,607
            
            
            
            47,356Inventories
            
            
            10,059,078
            
            
            
            6,201,743Prepayments
            
            
            524,356
            
            
            
            6,225,170Prepaid
      income taxes
            
            
            —
            
            
            
            110,420Refundable
      taxes credit on export sales
            
            
            —
            
            
            
            242,154Total
      current assets
            
            
            22,059,194
            
            
            
            18,728,948EQUIPMENT
      AND LEASEHOLD IMPROVEMENTS, net
            
            
            6,819,144
            
            
            
            8,105,990OTHER
      ASSETS:Deferred
      tax assets
            
            
            376,105
            
            
            
            17,259Advances
      on equipment purchases
            
            
            470,108
            
            
            
            373,873Total
      other assets
            
            
            846,213
            
            
            
            391,132Total
      assets
            
            $
            29,724,551
            
            
            $
            27,226,070LIABILITIES AND
      SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            11,682,262
            
            
            $
            6,019,634Accrued
      liabilities
            
            
            1,082,397
            
            
            
            1,062,595Customer
      deposits
            
            
            2,402,554
            
            
            
            3,656,179Other
      payables
            
            
            118,491
            
            
            
            443,145Value-added
      and other taxes payable
            
            
            3,121,838
            
            
            
            196,690Total
      current liabilities
            
            
            18,407,542
            
            
            
            11,378,243FAIR
      VALUE OF DERIVATIVE INSTRUMENTS
            
            
            29,563
            
            
            
            729,688COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Common
      stock, $.001 par value, 94,250,000 shares authorized, 29,626,916
      sharesissued
      and outstanding as of October 31, 2009 and 2008
            
            
            29,627
            
            
            
            29,627Additional
      paid-in capital
            
            
            8,137,766
            
            
            
            6,509,898Statutory
      reserves
            
            
            110,068
            
            
            
            110,068Retained
      earnings
            
            
            1,637,077
            
            
            
            7,321,412Accumulated
      other comprehensive income
            
            
            1,372,908
            
            
            
            1,147,134Total
      shareholders' equity
            
            
            11,287,446
            
            
            
            15,118,139Total
      liabilities and shareholders' equity
            
            $
            29,724,551
            
            
            $
            27,226,070








F-2
 Table of Contents







PERFECTENERGY
      INTERNATIONAL LTD. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
    (LOSS)FOR
      THE YEARS ENDED OCTOBER 31, 2009 AND
2008




2009
            
            
            2008REVENUES
            
            $
            31,454,956
            
            
            $
            63,660,023COST
      OF REVENUES
            
            
            30,346,831
            
            
            
            60,973,113GROSS
      PROFIT
            
            
            1,108,125
            
            
            
            2,686,910OPERATING
      EXPENSES:Selling,
      general and administrative
            
            
            7,274,047
            
            
            
            6,035,801Research
      and development
            
            
            409,148
            
            
            
            221,016Total
      operating expenses
            
            
            7,683,195
            
            
            
            6,256,817LOSS
      FROM OPERATIONS
            
            
            (6,575,070
            )
            
            
            (3,569,907
            )OTHER
      INCOME (EXPENSE):Interest
      expense and other bank charges
            
            
            (46,630
            )
            
            
            (20,083
            )Interest
      income
            
            
            52,456
            
            
            
            86,691Non-operating
      income
            
            
            2,362
            
            
            
            22,059Non-operating
      expense
            
            
            (154,776
            )
            
            
            (110,916
            )Change
      in fair value of derivative instruments
            
            
            700,125
            
            
            
            11,736,998Total
      other income (expense), net
            
            
            553,537
            
            
            
            11,714,749INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
            
            
            (6,021,533
            )
            
            
            8,144,842PROVISION
      (BENEFIT) FOR INCOME TAXES
            
            
            (337,198
            )
            
            
            63,652NET
      INCOME (LOSS)
            
            
            (5,684,335
            )
            
            
            8,081,190OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustments
            
            
            225,774
            
            
            
            954,668COMPREHENSIVE
      INCOME (LOSS)
            
            $
            (5,458,561
            )
            
            $
            9,035,858EARNINGS
      (LOSS) PER SHARE:Basic
            
            $
            (0.19
            )
            
            $
            0.27Diluted
            
            $
            (0.19
            )
            
            $
            0.27WEIGHTED
      AVERAGE NUMBER OF SHARES:Basic
            
            
            29,626,916
            
            
            
            29,609,117Diluted
            
            
            29,626,916
            
            
            
            29,713,312





F-3
 Table of Contents






PERFECTENERGY
      INTERNATIONAL LTD. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY




AccumulatedAdditional
            
            
            Retained
      earnings (deficit)
            
            
            otherCommon
      stock
            
            
            paid-in
            
            
            Statutory
            
            
            
            
            
            comprehensiveShares
            
            
            Par
      value
            
            
            capital
            
            
            reserves
            
            
            Unrestricted
            
            
            income
            
            
            TotalBALANCE,
      October 31, 2007
            
            
            29,575,761
            
            
            $
            29,576
            
            
            $
            4,717,506
            
            
            $
            110,068
            
            
            $
            (759,778
            )
            
            $
            192,466
            
            
            $
            4,289,838Issuance
      of common stock for cash
            
            
            9,375
            
            
            
            9
            
            
            
            26,241
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            26,250Issuance
      of common stock for late registration penalty
            
            
            41,780
            
            
            
            42
            
            
            
            167,078
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            167,120Options
      issued to employees
            
            
            
            
            
            
            
            
            
            
            1,599,073
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,599,073Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,081,190
            
            
            
            
            
            
            
            8,081,190Foreign
      currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            954,668
            
            
            
            954,668BALANCE,
      October 31, 2008
            
            
            29,626,916
            
            
            $
            29,627
            
            
            $
            6,509,898
            
            
            $
            110,068
            
            
            $
            7,321,412
            
            
            $
            1,147,134
            
            
            $
            15,118,139Options
      issued to employees
            
            
            
            
            
            
            
            
            
            
            1,627,868
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,627,868Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,684,335
            )
            
            
            
            
            
            
            (5,684,335
            )Foreign
      currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            225,774
            
            
            
            225,774BALANCE,
      October 31, 2009
            
            
            29,626,916
            
            
            $
            29,627
            
            
            $
            8,137,766
            
            
            $
            110,068
            
            
            $
            1,637,077
            
            
            $
            1,372,908
            
            
            $
            11,287,446







F-4
 Table of Contents





PERFECTENERGY
      INTERNATIONAL LTD. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED OCTOBER 31, 2009 AND
2008




2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            
            $
            (5,684,335
            )
            
            $
            8,081,190Adjustments
      to reconcile net income to cashprovided
      by (used in) operating activities:Depreciation
            
            
            1,330,194
            
            
            
            329,115Bad
      debts
            
            
            1,859,448
            
            
            
            8,737Inventory
      written off
            
            
            467,931
            
            
            
            163,921Loss
      from disposal of equipment
            
            
            3,872
            
            
            
            334Compensation
      expense for options issued to employees
            
            
            1,627,868
            
            
            
            1,599,073Change
      in fair value of derivative instruments
            
            
            (700,125
            )
            
            
            (11,736,998
            )Late
      registration penalties
            
            
            —
            
            
            
            167,120Changes
      in assets and liabilities:Accounts
      receivable
            
            
            308,974
            
            
            
            (3,882,644
            )Other
      receivables
            
            
            (4,096,860
            )
            
            
            (31,088
            )Inventories
            
            
            (4,174,593
            )
            
            
            (1,839,510
            )Prepayments
            
            
            3,886,279
            
            
            
            (4,708,209
            )Prepaid
      income taxes
            
            
            110,473
            
            
            
            (107,255
            )Refundable
      taxes credit on export sales
            
            
            242,269
            
            
            
            (235,211
            )Deferred
      expenses
            
            
            —
            
            
            
            370,609Deferred
      tax assets
            
            
            (337,197
            )
            
            
            63,652Accounts
      payable
            
            
            5,632,308
            
            
            
            5,658,242Accrued
      liabilities
            
            
            (32,025
            )
            
            
            982,233Customer
      deposits
            
            
            (1,437,719
            )
            
            
            2,171,189Other
      payables
            
            
            (91,588
            )
            
            
            171,929Taxes
      payable
            
            
            2,843,098
            
            
            
            181,198Net
      cash provided by (used in) operating activities
            
            
            1,758,272
            
            
            
            (2,592,373
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment and leasehold improvements
            
            
            (348,012
            )
            
            
            (4,984,344
            )Advances
      on equipment purchases
            
            
            (95,640
            )
            
            
            (363,155
            )Net
      cash used in investing activities
            
            
            (443,652
            )
            
            
            (5,347,499
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock
            
            
            —
            
            
            
            26,250Net
      cash provided by financing activities
            
            
            —
            
            
            
            26,250EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
            
            
            246,182
            
            
            
            234,129INCREASE
      (DECREASE) IN CASH
            
            
            1,560,802
            
            
            
            (7,679,493
            )CASH,
      beginning of year
            
            
            2,022,052
            
            
            
            9,701,545CASH,
      end of year
            
            $
            3,582,854
            
            
            $
            2,022,052Supplemental
      disclosures:Interest
      paid
            
            $
            —
            
            
            $
            —Income
      taxes paid
            
            $
            —
            
            
            $
            107,255Non-cash
      investing and financing activity:Value-added
      tax refund received on domestic equipment purchasetransferred
      from construction in progress to offset tax payable
            
            $
            133,316
            
            
            $
            —


F-5
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  Note 1 – Summary of Significant
Accounting Policies





(a) Organization and
Description of Business





Perfectenergy
International Limited (“PFGY” or “the Company”) was incorporated in the State of
Nevada on February 25, 2005.  The Company, through its subsidiaries,
is principally engaged in the research, development, manufacturing, and sale of
solar cells, solar modules, and photovoltaic (“PV”) systems.  The
Company’s manufacturing and research facility is located in Shanghai, China, and
it has sales and service offices in Shanghai, China and Germany.





In
October 2007, the Company entered into an Investment Agreement with Shanghai
Zizhu Science Park Development Co., Ltd. (“Science Park”), under which the
Company plans to construct a new solar cell production facility on certain land
in the Shanghai Zizhu Science-Based Industrial District of Shanghai, China,
which will expand lamination and cell production capacity.  As
required by the Investment Agreement, on February 28, 2008, the Company formed
Perfectenergy Solar-Tech (Shanghai) Ltd. (“Perfectenergy Solar-Tech”) under PRC
laws as a wholly owned subsidiary of Perfectenergy International Limited
(“Perfectenergy BVI”).  Perfectenergy BVI is required to contribute
$20,000,000 to the registered capital of Perfectenergy Solar-Tech, of which
$4,000,000 has been contributed with the remaining $16,000,000 to be contributed
by February 28, 2010.  Due to supplementary land use
restrictions, the Company is reviewing its options with regards to the
Investment Agreement as well as expansion plans with existing working capital.
The Company may apply for further changes in Perfectenergy Solar-Tech’s capital
commitment upon expiration of Investment Agreement. As of October 31, 2009,
this subsidiary was still in the development stage.





(b) Basis of Presentation and
Principles of Consolidation





The
consolidated financial statements reflect the activities of the Company and its
wholly owned subsidiaries, Perfectenergy International Limited (“Perfectenergy
BVI”), Perfectenergy (Shanghai) Limited (“Perfectenergy Shanghai”),
Perfectenergy GmbH (“Perfectenergy GmbH”), and Perfectenergy Solar-Tech
(Shanghai) Ltd. (“Perfectenergy Solar-Tech”).




All
significant intercompany balances and transactions have been eliminated in
consolidation.  The Company has reclassified certain prior year
amounts to conform to the current year presentation.  The accompanying
consolidated financial statements are in U.S. dollars and include PFGY and each
of its wholly owned subsidiaries.




(c) Use of
Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
amounts reported in the financial statements and accompanying
notes.  Management considers many factors in selecting appropriate
operational and financial accounting policies and controls, and in developing
the assumptions used to prepare these financial
statements.  Management must apply significant
judgment.  Among the factors, but not fully inclusive of all factors
that may be considered by management, are the following: the range of accounting
policies permitted by accounting principles generally accepted in the United
States of America; management’s understanding of the Company’s business - both
historical results and expected future results; the extent to which operational
controls exist that provide high degrees of assurance that all desired
information to assist in the estimation is available and reliable or whether
there is greater uncertainty in the information that is available upon which to
base the estimate; expectations of the future performance of the economy, both
domestically, and globally, within various areas that serve the Company’s
principal customers and suppliers of goods and services; expected rates of
exchange, sensitivity and volatility associated with the assumptions used in
developing estimates; and whether historical trends are expected to be
representative of future trends.








F-6
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  The
estimation process often times may yield a range of potentially reasonable
estimates of the ultimate future outcomes and management must select an amount
that lies within that range of reasonable estimates based upon the quantity,
quality, and risks associated with the variability that might be expected from
the future outcome and the factors considered in developing the
estimate.  This estimation process may result in the selection of
estimates that could be viewed as conservative or aggressive by
others.  Management attempts to use its business and financial
accounting judgment in selecting the most appropriate estimate; actual amounts,
however, may differ from those estimates.




(d) Fair value of Financial
Instruments





The
accounting standards regarding fair value of financial instruments and related
fair value measurements define financial instruments, define fair value,
establish a three-level valuation hierarchy for disclosures of fair value
measurement, and enhance disclosure requirements for fair value measures. The
carrying amounts reported in the consolidated balance sheets for receivables and
payables qualify as financial instruments and reflect reasonable estimates of
fair value because of the short period of time between the origination of such
instruments and their expected realization. The three levels of valuation
hierarchy are defined as follows:





·
            Level
      1 inputs to the valuation methodology which are quoted prices (unadjusted)
      for identical assets or liabilities in active
  markets.





·
            Level
      2 inputs to the valuation methodology that includes quoted prices for
      similar assets and liabilities in active markets, and inputs that are
      observable for the asset or liability, either directly or indirectly,
      substantially for the full term of the financial
    instrument.





·
            Level
      3 inputs to the valuation methodology which are unobservable and
      significant to the fair value
measurement.





Carrying
      Value as of
              October
      31, 2009
            
            Fair
      Value at October 31, 2009Level
      1
            
            
            Level
      2
            
            
            Level
      3Warrant
      liability (note 13)
            
            $
            29,563
            
            
            
            —
            
            
            
            —
            
            
            $
            29,563








F-7
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009


The
Company analyzes all financial instruments with features of both liabilities and
equity, pursuant to which the Company’s warrants were required to be recorded as
a liability at fair value and marked to market each reporting
period.  Except for the warrant liability, the Company did not
identify any asset and liability that is required to be presented on the balance
sheet at fair value in accordance with this accounting standard.





(e) Foreign Currency
Translation





The
reporting currency of the Company is the U.S. dollar.  The Company’s
principal operating subsidiaries established in the PRC use the local currency,
Renminbi (“RMB”), as their functional currency.  The Company’s sales
offices in Germany use the Euro (“EUR”) as their functional
currency.  The assets and liabilities of the Company’s Chinese
subsidiaries at October 31, 2009 were translated at 6.82 RMB to $1.00 as
compared to 6.83 RMB to $1.00 at October 31, 2008.  The assets and
liabilities of the Company’s German subsidiary at October 31, 2009 were
translated at €0.68 to $1.00 as compared to €0.77 to $1.00 at October 31,
2008.  Equity accounts were stated at their historical
rate.  The average translation rates applied to income statement
accounts of the Company’s Chinese subsidiaries for the years ended October 31,
2009 and 2008 were 6.82 RMB and 7.03 RMB, respectively.  The average
translation rates applied to income statement accounts of the Company’s German
subsidiary for the years ended October 31, 2009 and 2008 were €0.73 to $1.00,
and €0.67 to $1.00, respectively.  For the periods presented,
adjustments resulting from translating financial statements into U.S. dollars
are reported as cumulative translation adjustments and are shown as a separate
component of other comprehensive income (loss).  Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency are included in the results of
operations as incurred.





In
accordance with the accounting standard regarding "Statement of Cash Flows,"
cash flows from the Company's operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets.





(f) Cash and Cash
Equivalents





The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.





(g) Accounts
Receivable





The
Company conducts its business operations in the PRC, and it has sales offices in
Germany. Management reviews its accounts receivable on a regular basis and
analyzes historical bad debts, customer credit worthiness, current economic
trends, and changes in customer payment patterns to determine if the allowance
for doubtful account is adequate and adjusts the allowance when
necessary.  An estimate for doubtful accounts is recorded when
collection of the full amount is no longer probable.








F-8
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  (h) Other
Receivables





Other
receivables consist of advanced payment to be refunded by the Company’s
suppliers and intercompany transfer of foreign currencies held by the Company’s
export agents.    Management reviews its other receivables
on a regular basis and analyzes the financial conditions of the Company’s
suppliers and export agents to determine if the allowance for doubtful account
is adequate and adjusts the allowance when necessary.  An estimate for
doubtful accounts is recorded when collection of the full amount is no longer
probable.  At October 31, 2009 and 2008, allowance for doubtful
accounts amounted to $1,861,097 and $0, respectively.





(i) Inventories





Inventories
are stated at the lower of cost or market, using a weighted average cost
method.  The Company reviews its inventory periodically for possible
obsolete goods or to determine if any reserves are necessary for potential
obsolescence.  The Company wrote-off inventory totaling $467,931 and
$163,921 for the years ended October 31, 2009 and 2008,
respectively.  As of October 31, 2009, the Company determined that no
reserves are necessary.





(j) Prepayments





Prepayments
are prepayments to the Company’s suppliers. Some of the Company’s suppliers
require advanced payment before a delivery is made. Such prepayments are
recorded in the financial statements as prepayments until delivery has
occurred.





(k) Equipment and Leasehold
Improvements





Equipment
and leasehold improvements are stated at cost.  Depreciation is
computed by using the straight-line method at rates based on the estimated
useful lives of the various classes of property.  Estimates of useful
lives are based upon a variety of factors including durability of the asset, the
amount of usage that is expected from the asset, the rate of technological
change, and the Company’s business plans for the asset.  Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset.  Should the Company
change its plans with respect to the use and productivity of property and
equipment, it may require a change in the useful life of the asset or incur a
charge to reflect the difference between the carrying value of the asset and the
proceeds expected to be realized upon the asset’s sale or
abandonment.  Expenditures for maintenance and repairs are expensed as
incurred and significant major improvements are capitalized.





Estimated
useful lives of the Company’s assets are as follows:




Useful
      LifeLeasehold
      improvements
            Lease
      term (expires on May 31, 2011)Transportation
      equipment
            5
      yearsMachinery
            5 -
      10 yearsOffice
      equipment
            5
      years








F-9
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  (l) Impairment of Long-Lived
Assets





The
Company evaluates long-lived assets for impairment annually, and more often if
an event or circumstance occurs that triggers an impairment
test.  Substantial judgment is necessary in the determination as to
whether an event or circumstance has occurred that may trigger an impairment
analysis and in the determination of the related cash flows from the
asset.  Estimating cash flows related to long-lived assets is a
difficult and subjective process that applies historical experience and future
business expectations to revenues and related operating costs of
assets.  Should impairment appear to be necessary, subjective judgment
must be applied to estimate the fair value of the asset, for which there may be
no ready market, which oftentimes results in the use of discounted cash flow
analysis and judgmental selection of discount rates to be used in the
discounting process.  If the Company determines an asset has been
impaired based on the projected undiscounted cash flows of the related asset or
the business unit over the remaining amortization period, and if the cash flow
analysis indicates that the carrying amount of an asset exceeds related
undiscounted cash flows, the carrying value is reduced to the estimated fair
value of the asset or the present value of the expected future cash
flows.  As of October 31, 2009, the Company expects these assets to be
fully recoverable.





(m) Customer
deposits





Customer
deposits are prepayments from our customers.  Some of our sales
require customers to prepay before delivery is made.  Such prepayments
are recorded in our financial statements as customer deposits until delivery has
occurred.





(n) Value Added
Tax





The
Company’s sales of products in the PRC and Germany are subject to a value added
tax (“VAT”) in accordance with tax laws.  The value added tax applied
is 17% in the PRC and 19% in Germany, respectively, of the gross sales
price.  A credit is available whereby VAT paid on the purchases of
semi-finished products or raw materials used in the production of the Company’s
finished products, and payment of freight expenses can also be used to offset
the VAT due on sales of the finished products.





(o) Provision for Income
Taxes





The
Company accounts for income taxes in accordance with the FASB’s accounting
standard for income taxes. Under the asset and liability method as required by
this accounting standard requires the recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between income tax basis and financial reporting basis of assets and
liabilities.  Provision for income taxes consist of taxes currently
due plus deferred taxes.








F-10
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  The
Company adopted FASB’s accounting standard forAccounting for Uncertainty
in Income Taxes.  A tax position is recognized as a benefit only if it
is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur.  The
amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination.  For tax positions not
meeting the “more likely than not” test, no tax benefit is
recorded.  The accounting standard also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition.





The
Company accounts for income taxes using the asset and liability
method.  Deferred tax liabilities and assets are determined based on
temporary differences between the basis of assets and liabilities for income tax
and financial reporting purpose of the Company.  The deferred tax
assets and liabilities are classified according to the financial statement
classification of the assets and liabilities generating the
differences.  Valuation allowances are established when necessary
based upon the judgment of management to reduce deferred tax assets to the
amount expected to be realized and could be necessary based upon estimates of
future profitability and expenditure levels over specific time horizons in
particular tax jurisdictions.




(p) Revenue
Recognition





The
Company’s revenue recognition policies are in accordance with the FASB’s
accounting standard.  Revenues from solar cells, solar modules, and PV
systems are recognized upon shipment of the products only if no significant
Company obligations remain, the fee is fixed or determinable, and collection is
received or the resulting receivable is deemed probable.  Revenue is
recognized, net of discount and allowances, at the time of product
shipment.  All of the Company’s products that are sold in the PRC are
subject to a Chinese value-added tax at a rate of 17% of the gross sales price
or at a rate approved by the PRC local government.  All of the
Company’s products that are sold in Germany are subject to a Germany value-added
tax at a rate of 19% of the gross sales price or at a rate approved by the
Germany government.  In general, the Company does not accept product
returns; only under special situations, when both the Company and customers
agree, is a product exchange allowed.  Historically, the Company has
not experienced any product returns.  For solar cells, solar modules,
and PV systems, the Company is covered by product quality insurance, and product
liability insurance.  The product quality insurance retroactively
covers the period from July 1, 2007 to the end of the insurance period on June
30, 2010.  As such, the Company does not need maintain a provision for
potential warranty cost.





(q) Shipping and
Handling





Costs
related to shipping and handling of the products sold is included in selling,
general, and administrative expenses.  Shipping and handling expense
of sales amounted to $435,230 and $682,166 for the years ended October 31, 2009
and 2008, respectively.





(r) Advertising





Advertising
and promotion expenses are expensed as incurred, and the expense was immaterial
for the years ended October 31, 2009 and 2008.








F-11
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  (s) Research and Development
Costs





Research
and development expenses are expensed as incurred.  Research and
development expenses include salaries, consultant fees, supplies and materials,
as well as costs related to other overhead such as facilities, utilities, and
other departmental expenses.  The costs we incur with respect to
internally developed technology and engineering services are included in
research and development expenses. Research and development expenses amounted to
$409,148 and $221,016 for the years ended October 31, 2009 and 2008,
respectively.





(t) Earnings Per
Share





The
Company reports earnings per share in accordance with the provisions of FASB’s
related accounting standard. This standard requires the presentation of earnings
per share (EPS) as basic EPS and diluted EPS in conjunction with the disclosure
of the methodology used in computing such earnings per share.  Basic
EPS excludes dilution and is computed by dividing net income (loss) attributable
to common stockholders by the weighted average number of common shares
outstanding for the period.  Diluted EPS takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.





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





Year
      Ended
              October
      31,2009
            
            
            2008Net
      income (loss) for basic earnings per share
            
            $
            (5,684,335
            )
            
            $
            8,081,190Weighted
      average shares used in basic computation
            
            
            29,626,916
            
            
            
            29,609,117Diluted
      effect of options and warrants
            
            
            -
            
            
            
            103,195Weighted
      average shares used in diluted computation
            
            
            29,626,916
            
            
            
            29,712,312Weighted
      Average Earnings per shareBasic
            
            $
            (0.19
            )
            
            $
            0.27Diluted
            
            $
            (0.19
            )
            
            $
            0.27








F-12
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009


For the
year ended October 31, 2009, none of the 1,218,059 options and 3,975,714
warrants potentially dilutive were included in the calculation of diluted
earnings per share since their effect would be anti-dilutive.





For the year ended October 31, 2008,
the average stock price was greater than the exercise prices of the 460,000
warrants and 407,169 options, which resulted in additional weighted average
diluted common stock equivalents of 103,195; outstanding warrants in the amount
of 3,515,714 were excluded from the diluted earnings per share calculation as
they were anti-dilutive.





(u) Stock-Based
Compensation





The
Company records and reports stock based compensation pursuant to FASB’s related
accounting standard which defines a fair-value-based method of accounting for
stock based employee compensation and transactions in which an entity issues its
equity instruments to acquire goods and services from
non-employees.  Stock compensation for stock granted to non-employees
has also been determined in accordance with FASB’s related accounting standard
as the fair value of the consideration received or the fair value of equity
instruments issued, whichever is more reliably measured.





Note
3 – Recently Issued Accounting Standards




In
January 2009, the FASB issued an accounting standard related to Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets.  The accounting standard removes its
exclusive reliance on “market participant” estimates of future cash flows used
in determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred.  The adoption of the
accounting standard did not have a material impact on our consolidated financial
statements because all of our investments in debt securities are classified as
trading securities.





In April
2009, the FASB issued an accounting standard that makes the other-than-temporary
impairments guidance more operational and improves the presentation of
other-than-temporary impairments in the financial statements. This standard
replaced the existing requirement that the entity’s management assert it has
both the intent and ability to hold an impaired debt security until recovery
with a requirement that management assert it does not have the intent to sell
the security, and it is more likely than not it will not have to sell the
security before recovery of its cost basis. This standard provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this standard does not result in a
change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. The adoption of these FASB Staff
Positions did not have a material impact the Company’s consolidated financial
statements.








F-13
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The Company adopted this accounting
standard, but it did not have a material impact on the disclosures related to
its consolidated financial statements.





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009, and the Company does not expect this
standard to have a material effect on its consolidated financial
statements.





In June
2009, the FASB issued an accounting standard modifies how a company determines
when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. It clarifies that the
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. The accounting standard requires an ongoing
reassessment of whether a company is the primary beneficiary of a variable
interest entity. It also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. The accounting standard is effective for
fiscal years beginning after November 15, 2009. The Company is currently
assessing the impact of the standard on its consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles.” This standard
replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles,” and establishes two levels of GAAP, authoritative and
non-authoritative. The FASB Accounting Standards Codification (the
“Codification” or ASC) will become the source of authoritative, nongovernmental
GAAP, except for rules and interpretive releases of the Securities and Exchange
Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants.
All other non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative. The Company adopted the codification
standards which do not have a financial impact other than references to
authoritative literature incorporated herein.





In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. This update is effective for our first quarter 2010. The Company is
currently evaluating the impact of this ASU on its consolidated financial
statements.








F-14
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.





Note
4 – Accounts Receivable





Accounts
receivable consisted of the following:


October 31,
              2009
            
            
            October 31,
              2008Accounts
      receivable
            
            $
            3,744,299
            
            
            $
            3,880,053Less:
      allowance for doubtful accounts
            
            
            ―
            
            
            
            ―Total
            
            $
            3,744,299
            
            
            $
            3,880,053





At
October 31, 2009 and 2008, there was no allowance for doubtful accounts as
management believes all accounts balances were considered to be
collectible.





Note
5 – Other Receivables





Other
receivables consisted of the following:


October 31,
              2009
            
            
            October 31,
              2008Other
      receivables
            
            $
            6,009,704
            
            
            $
            47.356Less:
      allowance for doubtful accounts
            
            
            1,861,097
            
            
            
            ―Total
            
            $
            4,148,607
            
            
            $
            47,356





In June
and July 2008, Perfectenergy Shanghai entered into three purchase contracts for
purchasing original MEMC granular polysilicon from Sun Materials.  In
accordance with the terms of the purchase contracts, Perfectenergy Shanghai paid
100% of the advance payments to Sun Materials totaling approximately $3.7
million. However, as of October 31, 2009, Sun Materials is unable to either
deliver the goods or return most of the advancement. Followed by an abstract
debt acknowledgement and repayment agreement between Sun Materials and Regus
BVI, its original supplier for the MEMC granular polysilicon, Regus BVI is
obliged to repay the prepayments in five installments.  Sun Materials
began to repay the amount in partial amounts starting in November 2009.
Based on the current status, management estimated that a 50% provision
(approximately $1.9 million) is necessary against the full amount; the amount
was recognized in operating loss and reclassified the balance as other
receivables. The Company will continue to assess the collectability and make
necessary adjustment if circumstances dictate.








F-15
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  Note
6 – Inventories





Inventories consisted of the
following:




October 31,
              2009
            
            
            October 31,
              2008Raw
      materials
            
            $
            2,992,806
            
            
            $
            1,231,574Finished
      goods
            
            
            5,466,869
            
            
            
            3,896,110Work
      in progress
            
            
            1,576,788
            
            
            
            1,070,513Supplies
            
            
            22,615
            
            
            
            3,546Totals
            
            $
            10,059,078
            
            
            $
            6,201,743





Note
7 – Prepayments





Prepayments
are monies deposited or advanced to outside vendors on future inventory
purchases.  Some of the Company’s vendors require a certain amount of
money to be deposited with them as a guarantee that the Company will receive
their purchase on a timely basis and lower than market price.  This
amount is refundable and bears no interest.  Total outstanding
prepayments for inventory purchases were $524,356 and $6,225,170 as of October
31, 2009 and 2008, respectively.





Note
8 – Equipment and Leasehold Improvements





Equipment
and leasehold improvements consisted of the following:





October
      31,
            
            
            October
      31,2009
            
            
            2008Leasehold
      Improvements
            
            $
            1,658,986
            
            
            $
            650,167Transportation
      equipment
            
            
            276,131
            
            
            
            275,070Machinery
            
            
            6,543,213
            
            
            
            2,311,735Office
      equipment
            
            
            233,870
            
            
            
            154,070Construction
      in progress
            
            
            37,232
            
            
            
            5,317,155Totals
            
            
            8,749,432
            
            
            
            8,708,197Less
      accumulated depreciation
            
            
            (1,930,288
            )
            
            
            (602,207
            )Totals
            
            $
            6,819,144
            
            
            $
            8,105,990







F-16
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  Construction
in progress represents the costs incurred in connection with the construction of
machinery and equipments.





Depreciation
expense for the years ended October 31, 2009 and 2008 amounted to $1,330,194 and
$329,115, respectively.





Note
9 – Advances on Equipment Purchases





Advances
on equipment purchases represent partial payments for deposits on equipment
purchases and amounted to $470,108 and $373,873 as of October 31, 2009 and 2008,
respectively.





As of
October 31, 2009, balance of $278,730 includes the advance payment for the land
purchase by Shanghai Solar-Tech, the amount was return by the local government
authority in early December 2009.





Note
10 – Late Registration Penalties





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





In lieu
of making cash payments, the Company offered to issue restricted common stock at
a valuation of $4.00 per share for the first 30 days that the registration
statement was late in being declared effective by the SEC, which to which
certain of the Investors agreed.  Thus, the Company owed the Investors
taking cash payments a total of $912,347 as late registration
payments.  As of October 31, 2009, the Company paid $390,744 to the
Investors and issued an aggregate 41,780 shares valued at $167,120 to seven of
the Investors in lieu of a cash payment.  The settlement of the
remaining $521,603 is still in progress, and the expected final payment date is
pending by our Board of Directors.





Note
11 – Retirement Benefit Plans





Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees.  All permanent employees
are entitled to an annual pension equal to their basic salaries at
retirement.  The PRC government is responsible for the benefit
liability to these retired employees.  The Company is required to make
contributions to the state retirement plan at 22% of the monthly basic salaries
of the current employees.  For the years ended October 31, 2009 and
2008, the Company made pension contributions in the amount of $165,365 and
$157,971, respectively.








F-17
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  Note 12 – Shareholder’s
Equity





During
the fiscal year ended October 31, 2008, 9,375 shares of common shares were
issued at $2.80 per share upon the exercise of stock options.





Note
13 – Derivative Instruments





In order
for the Investor Warrants to be accounted for as equity, such warrants must
comply with FASB’s accounting standard related to derivative instruments and
hedging activities.  FASB’s accounting standard required that the
Investor Warrants contain a provision permitting the holder to redeem the
warrants for cash, based on a Black-Scholes valuation, in the event of a change
in control deemed not to be within the Company’s control, but the Investor
Warrants failed such test, resulting in a classification of the Investor
Warrants as derivative instrument liabilities rather than as equity
instruments.  The Company allocated the proceeds received between the
common stock and Investor Warrants first to the Investor Warrants based on the
fair value on the date the proceeds were received with the balance to common
stock. Net proceeds were allocated as follows:





Warrants
            
            $
            12,226,600Common
      stock
            
            
            3,766,371Total
      net proceeds
            
            $
            15,992,971





The
change in the fair value of the Investor Warrants, determined under the
Cox-Ross-Rubinstein binomial model, at each reporting date will result in either
an increase or decrease the amount recorded as liability, based on the
fluctuation of the Company’s stock price with a corresponding adjustment to
other income (or expense).  For the year ended October 31, 2008, a
gain of $11,736,998 was recognized in the accompanying income statements based
on the decrease in fair value since the last reporting date. At October 31,
2008, the fair value of the derivative instrument totaled
$729,688.  For the year ended October 31, 2009, a gain of $700,125 was
recognized in the accompanying income statements based on the decrease in fair
value since the last reporting date.  At October 31, 2009, the fair
value of the derivative instrument totaled $29,563.





The value
of the Investor Warrants at October 31, 2009 was determined using the
Cox-Ross-Rubinstein binomial model using the following assumptions: volatility
170%; risk free interest rate 0.05% for the Investor warrants and 0.27% for the
Placement and Advisory warrants; dividend yield of 0%; and expected term of 0.27
years of the Investor Warrants and 0.77 years of the Placement and Advisory
Warrants.  The volatility of the Company’s common stock was estimated
by management based on the historical volatility of our common stock, the risk
free interest rate was based on Treasury Constant Maturity Rates published by
the U.S. Federal Reserve for periods applicable to the expected life of the
warrants, the expected dividend yield was based on the Company’s current and
expected dividend policy, and the expected term is equal to the contractual life
of the warrants.








F-18
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  As of
October 31, 2009, the Company had warrants as
follows:




Weighted
            
            AverageWarrants
            
            Warrants
            
            AverageExercise
            
            RemainingContractualOutstanding
            
            Exercisable
            
            Price
            
            LifeBalance,
      October 31, 2007
            
            
            3,975,714
            
            3,975,714
            
            $
            3.68
            
            2.59Granted
            
            
            ―
            
            ―
            
            
            ―
            
            ―Forfeited
            
            
            ―
            
            ―
            
            
            ―
            
            ―Exercised
            
            
            ―
            
            ―
            
            
            ―
            
            ―Balance,
      October 31,2008
            
            
            3,975,714
            
            3,975,714
            
            $
            3.68
            
            1.36Granted
            
            
            ―
            
            ―
            
            
            ―
            
            ―Forfeited
            
            
            ―
            
            ―
            
            
            ―
            
            ―Exercised
            
            
            ―
            
            ―
            
            
            ―
            
            ―Balance,
      October 31, 2009
            
            
            3,975,714
            
            3,975,714
            
            $
            3.68
            
            0.36





Note 14 – Accounting for Stock-Based
Compensation





PFGY Stock
Options





On
September 5, 2007, the Company adopted the “Perfectenergy International Limited
2007 Stock Incentive Plan” (the “Stock Incentive Plan”).  The Company
reserved 1,500,000 shares of its common stock pursuant to the Stock Incentive
Plan.  During the ten months ended October 31, 2007, under the Stock
Incentive Plan, the Company issued 1,282,358 options to the employees and the
directors of the Company, of which 164,298 options were cancelled in December
2007 and 25,000 were cancelled in March 2008.  75,000 of such issued
options vested immediately, 1,168,060 of such options were to vest evenly on an
annual basis over the three years following the grant date of August 8, 2007, of
which 164,298 options were cancelled in December 2007, and 25,000 were cancelled
in March 2008, and 39,298 of such options were to vest evenly on a monthly basis
over the thirty-six months following the grant date of August 8,
2007.  The Company used the Cox-Ross-Rubinstein binomial model to
value the options at the time they were issued, based on volatility of 70%,
dividend yield of 0% and the stated exercise prices and expiration dates of the
instruments and using an average risk-free rate of 4.5%.





On
February 1, 2008, the Company issued 125,000 options to the Company’s Chief
Financial Officer.  All options vest evenly on an annual basis over
the three years following the date of grant.  The Company used the
Cox-Ross-Rubinstein binomial model to value the options at the time they were
issued, based on volatility of 70%, dividend yield of 0% and the stated exercise
prices of the instruments and using an average risk-free rate of
2.36%.








F-19
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  The
volatility of the Company’s common stock was estimated by management based on
the historical volatility of the Company’s common stock, the risk free interest
rate was based on Treasury Constant Maturity Rates published by the U.S. Federal
Reserve for periods applicable to the estimated life of the options, and the
expected dividend yield was based on the current and expected dividend
policy.  The value of the options was based on the Company’s common
stock price on the date each option was granted. Because the Company does not
have a history of employee stock options, the estimated life is based on
one-half of the sum of the vesting period and the contractual life of each
option.  This is the same as assuming that the options are exercised
at the mid-point between the vesting date and expiration
date.





Stock-based
award activity during the years ended October 31, 2009 and 2008 was as
follows:




WeightedOptions
            
            
            AverageExercise
            
            
            AggregateOutstanding
            
            
            Price
            
            
            Intrinsic ValueBalance,
      October 31, 2007
            
            
            1,282,358
            
            
            $
            2.80
            
            
            $
            3,130,565Granted
            
            
            125,000
            
            
            
            4.08
            
            
            
            90,000Forfeited
            
            
            (189,298
            )
            
            
            2.80
            
            
            
            ―Exercised
            
            
            (9,375
            )
            
            
            2.80
            
            
            
            ―Balance,
      October 31, 2008
            
            
            1,208,685
            
            
            $
            2.93
            
            
            $
            ―Granted
            
            
            ―
            
            
            
            ―
            
            
            
            ―Forfeited
            
            
            ―
            
            
            
            ―
            
            
            
            ―Exercised
            
            
            ―
            
            
            
            ―
            
            
            
            ―Balance,
      October 31, 2009
            
            
            1,208,685
            
            
            $
            2.93
            
            
            $
            ―





As of
October 31, 2009, approximately $1.3 million of estimated expense with respect
to non-vested stock-based awards has yet to be recognized and will be recognized
as an expense over the employee’s remaining weighted average service period of
approximately 0.77 years.  As of October 31, 2009, 785,998 of the
outstanding options are exercisable. Compensation expenses for the years ended
October 31, 2009 and 2008 were $1,627,868 and $1,599,073,
respectively.




Stock-based
award as of October 31, 2009 is as follows:





Outstanding
      Options
            
            Exercisable
      OptionsNumber
              of Options
            
            Exercise
              Price
            
            Average
              Remaining
              Contractual
              Life
            
            Number
              of Options
            
            Exercise
              Price
            
            Average
              Remaining
              Contractual
              Life1,083,685
            
            $
            2.80
            
            
            7.78
            
            
            744,331
            
            $
            2.80
            
            
            7.78125,000
            
            $
            4.08
            
            
            3.25
            
            
            41,667
            
            $
            4.08
            
            
            3.25








F-20
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  Note
15 – Statutory Reserves





The laws
and regulations of the PRC require that before an enterprise distributes profits
to its owners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations to investors, in proportions determined at
the discretion of the board of directors, after the statutory
reserve.  The statutory reserve includes the surplus reserve fund and
the enterprise fund.  The statutory reserve represents restricted
retained earnings.





Surplus Reserve
Fund





Pursuant
to the PRC’s accounting standards, Perfectenergy Shanghai and Perfectenergy
Solar-Tech are required to set aside 10% of their after-tax profit each year to
their general reserves until the accumulative amount of such general reserves
reaches 50% of their respective registered capital.  These allocations
must be made before Perfectenergy Shanghai or Perfectenergy Solar-Tech can
distribute any cash dividends to each of their sole shareholder, Perfectenergy
BVI.  For the fiscal years ended October 31, 2009 and 2008, neither
Perfectenergy Shanghai nor Perfectenergy Solar-Tech made any contribution to
their respective surplus reserve fund.





In
addition to using the funds in their surplus reserves to distribute cash
dividends to their shareholders, Perfectenergy Shanghai and Perfectenergy
Solar-Tech may also use such funds (i) during a liquidation, (ii) to cover a
previous years’ losses, if any, (iii) for business expansion, or (iv) for
conversion to registered capital by issuing new shares to existing shareholders
in proportion to their holdings, provided that the remaining surplus reserve
fund balance after such issue is not less than 25% of each of their registered
capital, or by increasing the par value of the shares currently held by existing
shareholders.





Enterprise
Fund





The
enterprise fund may be used to acquire plant and equipment or to increase
working capital to expand on production and business operations.  No
minimum contribution is required, and neither Perfectenergy Shanghai nor
Perfectenergy Solar-Tech made any contributions to their respective enterprise
fund for the fiscal years ended October 31, 2009 and 2008.





Note 16 – Income
Taxes




Under the
income tax laws of the PRC, Chinese companies are generally subject to an income
tax at an effective rate of 33% (30% state income taxes plus 3% local income
taxes) on income reported in the statutory financial statements after
appropriate tax adjustments, unless the enterprise is located in a specially
designated region where enterprises are granted a three-year income tax
exemption and a 50% income tax reduction for the next three years or the
enterprise is a manufacturing related joint venture with a foreign enterprise or
a wholly owned subsidiary of a foreign enterprise, which are granted a two-year
income tax exemption and a 50% income tax reduction for the next three
years.








F-21
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  Perfectenergy
Shanghai was established on July 8, 2005 as a wholly owned subsidiary of the
Company, a foreign enterprise in the PRC.  Thus, Perfectenergy
Shanghai was granted an income tax exemption for the years ended December 31,
2006 and 2005, was entitled to a 50% reduction of the income tax rate of 33% for
2007 (or a rate of 16.5%), and is entitled to a 50% reduction of the income tax
rate of 25% for 2008 and 2009 (or a rate of
12.5%).





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES’s”) and Foreign Invested
Enterprises (“FIEs”).  The key changes are as follows:




a.
            The
      new standard EIT rate of 25% will replace the 33% rate currently
      applicable to both DES’s and FIEs, except for high tech companies that pay
      a reduced rate of 15%;





b.
            Companies
      established before March 16, 2007 will continue to enjoy tax holiday
      treatment approved by local government for a grace period of 5 years or
      until the end of the tax holiday term, whichever is
  sooner.





The
following table reconciles the U.S. statutory tax rates to the Company’s
effective tax rate as of October 31, 2009:





Year
      Ended
              October
      31,2009
            
            2008U.S.
      statutory rates
            
            
            34.0
            %
            34.0
            %Foreign
      income not recognized in U.S.
            
            
            (34.0
            )
            (34.0
            )China
      income taxes
            
            
            25.0
            
            25.0China
      income tax exemption
            
            
            (12.5
            )
            (12.5
            )Germany
      income taxes
            
            
            31.5
            
            30.9Germany
      income tax exemption
            
            
            (0.0
            )
            (0.0
            )Other
      Item (a)
            
            
            (44.0
            )
            (42.6
            )Effective
      income tax rates
            
            
            0.0
            %
            0.8
            %





(a)
              These
      rates differ from the stated effective tax rate in China mainly due to
      losses incurred by the non-Chinese entities or other non-deductible
      expenses that are not deductible in the
PRC.








F-22
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009


The
estimated tax savings for the years ended October 31, 2009 and 2008 amounted to
$0 and $43,506, respectively. There is no effect on basic and diluted
earnings per share if the income tax had been applied for the years ended
October 31, 2009 and 2008.





Since
Perfectenergy Shanghai had an operating loss for the year ended October 31,
2009, the loss can be carried forward to offset income for the next five
years.  The Company recorded non-current deferred tax assets of
$95,105 and $17,259 as of October 31, 2009 and 2008, respectively.  Based
on the foregoing information, the Company believes that a valuation allowance is
not deemed necessary for the deferred assets for the following reasons: (i)
there will be sufficient operating income generated in future years based on the
fact that the Company’s wholly owned subsidiary, Perfectenergy Shanghai, is
expected to generate profits based on sales orders received for future periods,
and (ii) the current operating loss of Perfectenergy Shanghai can be carried
forward for five years to offset future operating income under PRC tax
regulations.





Perfectenergy
GmbH’s aggregated tax burden, including corporate income tax, plus solidarity
surcharge and trade tax is 31.5%.  The Company recorded non-current
deferred tax assets of $281,000 and $0 as of October 31, 2009 and 2008,
respectively.  The Company believes that a valuation allowance is not
deemed necessary for the deferred assets as there will be sufficient operating
income generated in future years based on the fact that the Company’s
subsidiary, Perfectenergy GmbH, is expected to generate profits based on sales
orders received for future periods.  German corporations will now be
subject to limitation on the utilization of loss carryforwards for corporation
tax. This so-called minimum tax is computed by allowing the first €1 million of
net operating loss carryforwards to offset taxable income. Any utilization above
that threshold will generally be limited to 60% of taxable income. There is no
expiration date for the net operating loss carryforwards. Under the prior law,
German corporations were able to offset 100% of their income with loss
carryforwards.





PFGY was
incorporated in the United States and has incurred net operating losses for
income tax purposes for the year 2009 and 2008, respectively. The estimated
accumulated net operating loss carry forwards for United States income taxes
amounted to $397,000 and $376,000 as of October 31, 2009 and 2008, which may be
available to reduce future years’ taxable income. These carry forwards will
expire, if not utilized, between 2027 and 2029. Management believes that the
realization of the benefits from these losses appears uncertain due to the
Company’s limited operating history and continuing losses for United States
income tax purposes. Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to zero. The
valuation allowance at October 31, 2009 was $135,000. The net change in the
valuation allowance for year ended October 31, 2009 was an increase of $7,200.
Management will review this valuation allowance periodically and make
adjustments as warranted.





The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $0 as of October 31, 2009.








F-23
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  Value-added and Other Taxes
Payable





Value-added
and other taxes payable consisted of the following:




October
      31,
            
            October
      31,2009
            
            2008Value-added
      taxes payable
            
            $
            3,079,786
            
            
            $
            187,195Employee
      individual income tax withheld
            
            
            42,052
            
            
            
            9,495Total
            
            $
            3,121,838
            
            
            $
            196,690





Note
17 – Concentration of Risk





Cash





Cash
includes cash on hand and demand deposits in accounts maintained with either
state owned banks or renowned local banks within the PRC, the United States,
Hong Kong, and Germany.  Certain financial instruments, which subject
the Company to concentration of credit risk, consist of cash.  The
Company maintains cash balances at financial institutions which, from time to
time, may exceed Federal Deposit Insurance Corporation insured limits for the
banks located in the United States, may exceed Hong Kong Deposit Protection
Board insured limits for the banks located in Hong Kong, or may exceed
Compensation Scheme of German Banks and Deposit Protection Fund of Association
of German Banks insured limits for the banks located in Germany (amounts up to
€1.5 million per depositor are fully protected in German
Banks).  Balances at financial institutions or state owned banks
within the PRC are not covered by insurance.  Total cash in banks at
which the Company’s deposits are not covered by insurance amounted to $1,347,547
and $1,453,983 at October 31, 2009 and 2008, respectively.  The
Company has not experienced any losses in such accounts and believes it is not
exposed to any risks on its cash in bank accounts.





Major
Customers





For the
fiscal years ended October 31, 2009 and 2008, five customers accounted for
approximately 74% and 73%, respectively, of the Company's
sales.  These customers accounted for approximately 59% and 69% of the
Company’s accounts receivable as of October 31, 2009 and 2008,
respectively.





Major
Vendors





For the
fiscal years ended October 31, 2009 and 2008, the Company purchased
approximately 61% and 59%, respectively, of their raw materials from one major
supplier-Tianjing HuanOu Semi-conductor Material Technology Co.,
Ltd.  The supplier represented 45% and 0% of the Company’s total
accounts payable as of October 31, 2009 and 2008, respectively.





Political and Economic
Risk





The
Company's major operations are carried out in the PRC.  Accordingly,
the Company's business, financial condition, and results of operations may be
influenced by the political, economic, and legal circumstances in the PRC and by
the general state of the PRC's economy.








F-24
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe.  These include risks associated with, among other
things, the political, economic, and legal environments and foreign currency
exchange.  The Company's results may be adversely affected by changes
in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.





Revenue by Geographic
Area





Revenues
are attributed to geographic areas based on the final shipping destination of
the Company’s products.  The following table summarizes the financial
information for the Company’s revenues based on geographic area:




Geographic
      Area
            
            Year
      Ended
              October
      31,2009
            
            
            2008China
            
            $
            2,666,300
            
            
            $
            8,670,694Germany
            
            
            28,788,656
            
            
            
            31,267,812Spain
            
            
            —
            
            
            
            23,255,326Other
      European Countries
            
            
            —
            
            
            
            466,191Total
      revenues
            
            $
            31,454,956
            
            
            $
            63,660,023





Note 18 – Commitments





Operating Lease
Commitments





The
Company’s office lease for Perfectenergy Shanghai is under a five-year term
expiring May 31, 2011 with a monthly rent of approximately $16,066 (RMB
109,700).   The Company entered into a three-year office lease for
Perfectenergy GmbH expiring November 30, 2010 with a monthly rent of
approximately $2,176 (approximately EUR 1,452).  The Company entered
into a two-year lease for Perfectenergy Solar-Tech expiring March 14, 2010 with
a monthly rent of $5,553 (approximately RMB40,000).  At October 31,
2009, total future minimum lease payments under an operating lease were as
follows:




Year
      Ended October 31
            
            Amount2010
            
            $
            264,5612011
            
            
            120,727Thereafter
            
            
            —








F-25
 Table of Contents




PERFECTENERGY INTERNATIONAL LTD. AND
SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 October
31, 2009
  
  Total
rent expense for the fiscal years ended October 31, 2009 and 2008 amounted to
$316,636 and $315,038, respectively.





Long-Term Silicon Supply
Agreements





To ensure
a long-term supply, the Company entered into a five-year long-term supply
contract with Tianjin Huan-ou Semiconductor Technology Inc., Ltd. (“Tianjin
Huan-ou”) on July 20, 2008, the effectiveness of which was conditioned upon (i)
Perfectenergy Shanghai making an advance payment in the aggregate amount of
$14.7 million to Tianjin Huan-ou by April 20, 2009, 20% of which will be
refunded by Tianjin Huan-ou to Perfectenergy Shanghai by October 31 of each year
during the term of the agreement, starting in 2009; and (ii) shareholder
approval by both parties.  According to the latest amendment to the
agreement, the price per piece is based on the then-current market price and
quantity delivery is based on mutual negotiation.  In addition, the
advance payment clause under this long-term contract is being negotiated by both
parties due to changes in the silicon wafer supply market.  As
of October 31, 2009, the Company made $0 prepayment to the vendor but had a
payable of approximately $5.3 million (RMB 36,000,000) to Tianjin
Huan-ou.





Note
19 – Subsequent Events





The
Company has performed an evaluation of subsequent events through January 29,
2010, which is the date the financial statements were issued.









F-26
 Table of Contents




ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.





There are
no reportable disagreements with our former independent auditors, Moore Stephens
Wurth Frazer and Torbet, LLP, or our current independent auditors, Frazer Frost,
LLP.








ITEM 9A(T).  CONTROLS AND PROCEDURES.





Disclosure
Controls and Procedures





Regulations
under the Securities Exchange Act of 1934, as amended, require public companies
to maintain “disclosure controls and procedures,” which are defined to mean a
company’s controls and other procedures that are designed to ensure that
information required to be disclosed in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized, and reported, within
the time periods specified in the SEC’s rules and forms.  Our Chief
Executive Officer and Chief Financial Officer carried out an evaluation of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report.  Based on those evaluations, as of
October 31, 2009, our Chief Executive Officer and Chief Financial Officer
believe that:





(i)
            our
      disclosure controls and procedures are designed to ensure that information
      required to be disclosed by us in the reports we file under the Exchange
      Act is recorded, processed, summarized, and reported within the time
      periods specified in the SEC’s rules and forms, and that such information
      is accumulated and communicated to our management, including the Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosure;
  and





(ii)
            our
      disclosure controls and procedures are ineffective due to the material
      weaknesses described below under “Management’s annual report on internal
      control over financial reporting.”





Notwithstanding
management’s assessment that our internal control over financial reporting was
ineffective as of October 31, 2009 due to the material weaknesses described
below under “Management’s annual report on internal control over financial
reporting,”
we believe that the consolidated financial statements included in this annual
report on Form 10-K correctly present our financial condition, results of
operations, and cash flows for the fiscal years covered by such statements in
all material respects.





Internal
Control over Financial Reporting





(a)           
Management’s annual report on
internal control over financial reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Internal control over financial
reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the supervision of,
the Company’s principal executive officer and principal financial officer and
effected by the Company’s board of directors, management, and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:





·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;





·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of management and
      directors of the Company; and





·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.





Because
of its inherent limitations, the Company’s internal control over financial
reporting may not prevent or detect misstatements.  Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and
presentation.  Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





Our
management assessed the effectiveness of our internal control over financial
reporting as of October 31, 2009.  In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework.




- 29
-
 Table of Contents





Based on
that evaluation, our management concluded that our internal control over
financial reporting is not effective, as of October 31, 2009, as management
identified the following material weaknesses in our financial statement
reporting process:





(i)
            Lack
      of sufficient administrative and accounting support for the expansion of
      our German subsidiary; and





(ii)
            Deficiencies
      in the supervision and monitoring of the preparations process of our
      annual financial statements, and the reviewing of such financial
      statements.





Our
management believes that the material weaknesses identified above were the
direct result of a significant increase in operating activities by our German
subsidiary during the 2009 fiscal year.  We have taken the following
measures to remediate these material weaknesses:





(i)
            Hire
      additional financial reporting and accounting personnel with relevant
      account experience, skills, and knowledge in the preparation of financial
      statements under the requirements of US GAAP and financial reporting
      disclosure pursuant to SEC rules;
and





(ii)
            Develop
      a rigorous process for collecting and reviewing information required for
      the preparation of financial
statements.





We plan
on continuing to identify and implement remedial measures.





This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.




(b)           Changes
in internal control over financial reporting





There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) or
Rule15d-15(d) promulgated under the Exchange Act that occurred during our
last fourth fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.








ITEM 9B.  OTHER INFORMATION.





None.







- 30
-
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PART
III





ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE.




Current
Management





Wennan Li, 43,has been our
Chairman, Chief Executive Officer and President since August 8,
2007.  His current term as CEO and President ends on September 1,
2012.  Mr. Li is up for re-election to the Board at our 2010 annual
stockholder meeting. Mr. Li has extensive experience with technological
development, production management, and international marketing in the PV
industry.  Mr. Li is the founder, director, and general manager of our
subsidiary, Perfectenergy Shanghai, since August 2005.  From November
2002 to August 2005, Mr. Li was the Vice President of Topsolar Shanghai Limited,
a leading PV company in China.  He has also served as a PV industry
expert advising the Shanghai government in matters relating to the PV
industry.  Mr. Li received a master’s degree in 1991 from the
Management School of Shanghai Jiaotong University and a bachelor’s degree in
1988 from Xi’an Jiaotong University in Electrical Automation.





Xiaolin Zhuang, 38,has been
our Chief Financial Officer and Secretary since February 1, 2008.  His
term of office with the Company ends on January 31, 2011.  Concurrent
to these positions, Mr. Zhuang serves as the Chief Financial Officer of our
subsidiary, Perfectenergy Shanghai, since February 2008.  Prior to
joining the Company, Mr. Zhuang served as the China Financial Controller of
Synthesis Energy Systems, Inc. from April 2007 to January 2008.  From
November 2003 to May 2007, Mr. Zhuang served as the Finance Manager and Group
Internal Auditor Head for Jebsen & Co. (China) Ltd. & Jebsen & Co.
Ltd.  Since September 1995, Mr. Zhuang has served as a member of the
China Institute of Certified Public Accountants (CICPA).  Mr. Zhuang
earned a bachelor’s degree in Economics in 1994 from the Shanghai University of
Finance and Economics.





Diping Zhou, 42,has been our
Vice President of Operations since September 1, 2008.  Her current
term ends on September 1, 2012.  Ms. Zhou has extensive accounting
experience, and prior to her current position, she served as our Chief
Accounting Officer, Treasurer, and Secretary since August 8,
2007.  Concurrent to her position with the Company, she also serves as
Vice President and an accountant for Perfectenergy Shanghai.  From
2002 through 2005, Ms. Zhou was the manager of budget and financial department
in Topsolar Shanghai Limited, a leading Chinese solar energy products
manufacturer.  Ms. Zhou received a bachelor’s degree in Accounting
from Shanghai Lixin University of Commerce in 1988.  Ms. Zhou has
extensive accounting experience.





Min Fan, 44, has been a
director since August 25, 2007, and he is up for re-election to the Board at our
2010 annual stockholder meeting.  Mr. Fan is one of the co-founders of
Ctrip.com International Ltd. (Nasdaq: CTRP), a Chinese-based travel services
business.  He has served as CTRP’s Chief Executive Officer since
January 2006 and as a director since October 2006.  He also served as
CTRP’s Chief Operating Officer from November 2004 to January 2006, and as CTRP’s
Executive Vice President from 2000 to November 2004.  Mr. Fan is also
a founding stockholder of Home Inns & Hotels Management, Inc. (Nasdaq:
HMIN), an economy hotel developer, operator, and
franchisor.  Mr. Fan obtained a master’s and bachelor’s degree
from Shanghai Jiao Tong University, and studied at the Lausanne Hotel Management
School of Switzerland in 1995.




Yunxia Yang, 52, has been a
director since August 25, 2007, and she is up for re-election to the Board at
our 2010 annual stockholder meeting.  Ms. Yang is one China’s leading
solar energy researchers with extensive experience in solar products development
and has been a professor in the School of Materials Science and Engineering at
the East China University of Science & Technology since 1987.  Ms.
Yang received her bachelor’s degree in 1982 and a master’s degree in 1987 in the
study of Application (Macromolecule) Materials, both from East China University
of Science & Technology.




Adam Roseman, 31, has been a
director since August 25, 2007, and he is up for re-election to the Board at our
2010 annual stockholder meeting.  Mr. Roseman has extensive experience
in finance and management.  He is the founder and Chief Executive
Officer of ARC Investment Partners, LLC and ARC China,
Inc.  Previously, Mr. Roseman was an investment banker in various
sectors at Lehman Brothers, Piper Jaffray, and Goldman Sachs.




Yajun Wu, 50, has been a
director since November 20, 2007, and he is up for re-election to the Board at
our 2010 annual stockholder meeting.  Mr. Wu serves as the Executive
Vice President and Deputy Chief Financial Officer of Alcatel Shanghai Bell Co.,
Ltd. in Shanghai, a position that he has held since February
2003.  From July 2002 to February 2003, he was Alcatel’s Director of
Credit Management.  From March 1999 to July 2002, Mr. Wu served as
Vice President and Deputy Chief Financial Officer of Shanghai Bell Alcatel
Mobile Communication System Co., Ltd.




Family
Relationships




There are
no family relationships between or among any of the current directors, executive
officers, or persons nominated or charged by the Company to become directors or
executive officers.




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Involvement
in Certain Legal Proceedings





None of
our directors or executive officers has, during the past five
years:




·
            had
      any petition under the federal bankruptcy laws or any state insolvency law
      filed by or against, or had a receiver, fiscal agent, or similar officer
      appointed by a court for the business or property of such person, or any
      partnership in which he was a general partner at or within two years
      before the time of such filing;




·
            been
      convicted in a criminal proceeding or a named subject of a pending
      criminal proceeding (excluding traffic violations and other minor
      offenses);




·
            been
      the subject of any order, judgment, or decree, not subsequently reversed,
      suspended, or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining him from, or otherwise limiting, the following
      activities:




(i)
            acting
      as a futures commission merchant, introducing broker, commodity trading
      advisor, commodity pool operator, floor broker, leverage transaction
      merchant, any other person regulated by the Commodity Futures Trading
      Commission, or an associated person of any of the foregoing, or as an
      investment adviser, underwriter, broker or dealer in securities, or as an
      affiliated person, director or employee of any investment company, bank,
      savings and loan association or insurance company, or engaging in or
      continuing any conduct or practice in connection with such
      activity;




(ii)
            engaging
      in any type of business practice;
or




(iii)
            engaging
      in any activity in connection with the purchase or sale of any security or
      commodity or in connection with any violation of federal or state
      securities laws or federal commodities
laws;




·
            been
      the subject of any order, judgment, or decree, not subsequently reversed,
      suspended, or vacated, of any federal or state authority barring,
      suspending, or otherwise limiting for more than 60 days the right of such
      person to engage in any activity described in (i) above, or to be
      associated with persons engaged in any such
  activity;




·
            been
      found by a court of competent jurisdiction in a civil action or by the SEC
      to have violated any federal or state securities law, where the judgment
      in such civil action or finding by the SEC has not been subsequently
      reversed, suspended, or vacated; or




·
            been
      found by a court of competent jurisdiction in a civil action or by the
      Commodity Futures Trading Commission to have violated any federal
      commodities law, where the judgment in such civil action or finding by the
      Commodity Futures Trading Commission has not been subsequently reversed,
      suspended, or vacated.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934





Section
16(a) of the Exchange Act requires our executive officers, directors, and
persons who beneficially own more than 10% of a registered class of our equity
securities to file with the SEC initial statements of beneficial ownership,
reports of changes in ownership, and annual reports concerning their ownership
of our common shares and other equity securities on Forms 3, 4, and 5
respectively.  Executive officers, directors, and greater than 10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file.  Based on a review of the copies of
such forms received by us, and to the best of our knowledge, no required reports
during the fiscal year ended October 31, 2009 were untimely filed by any
executive officer, director, or greater than 10% stockholder.





Code
of Ethics




We have
adopted a Code of Business Conduct and Ethics that applies to our executive
officers, directors, and employees, which code is attached to our annual report
on Form 10-K filed with the SEC on January 26, 2009.  A copy of our
code of ethics will also be provided to any person without charge upon written
request sent to us at our offices.





Material
Changes to the Procedures by which Security Holders may Recommend Nominees to
the Board





There
have been no material changes to the procedures by which our security holders
may recommend nominees to the Board of Directors.





Audit
Committee; Audit Committee Financial Expert





We formed
an Audit Committee of our board of directors and approved the charter for such
committee on July 29, 2008.  The members of our Audit Committee are
Yajun Wu, Adam Roseman, and Yunxia Yang.  Mr. Wu is the Audit
Committee’s Chairman, and he is an independent member of the board, as defined
by the SEC and the Nasdaq Capital Market.  The board of directors has
determined that Mr. Wu is also an “audit committee financial expert” as defined
by SEC rules.




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ITEM 11.  EXECUTIVE COMPENSATION.





The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended October 31, 2009, 2008,
and 2007 by (i) our Chief Executive Officer (principal executive officer), (ii)
our Chief Financial Officer (principal financial officer), (iii) the three most
highly compensated executive officers other than our CEO and CFO who were
serving as executive officers at the end of our last completed fiscal year whose
total compensation exceeded $100,000 during such fiscal year ends, and (iv) up
to two additional individuals for whom disclosure would have been provided but
for the fact that the individual was not serving as an executive officer at the
end of our last completed fiscal year whose total compensation exceeded $100,000
during such fiscal year ends.  The compensation amounts reflected in
the table below are expressed in U.S. Dollars based on the interbank exchange
rate of RMB6.8285 for each 1.00 U.S. Dollar, on October 31,
2009.




SUMMARY COMPENSATION
TABLE




Name
      and principalposition
            
            Year
            
            Salary
            
            
            Bonus
            
            
            Stock
              Awards
            
            
            Option
              Awards
      (1)
            
            
            Non-Equity
              Incentive
              Compensa-
              tion
            
            
            Non-qualified
              Deferred
              Compensa-
              tion
              Earnings
            
            
            All
      Other
              Compen-
              sation
            
            
            TotalWennan
      Li,
            
            2009
            
            $
            105,400
            
            
            $
            8,800
            
            
            $
            ―
            
            
            $
            565,576
            (2)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            679,776Chief
      Executive
            
            2008
            
            $
            106,618
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            567,125
            (2)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            673,743Officer
            
            2007
            
            $
            48,552
            (3)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            130,160
            (2)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            178,712Xiaolin
      Zhuang,
            
            2009
            
            $
            87,478
            
            
            $
            7,320
            
            
            $
            ―
            
            
            $
            109,274
            (4)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            204,072Chief
      Financial
            
            2008
            
            $
            66,176
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            81,731
            (4)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            4,320
            (5)
            
            $
            152,227Officer
            
            2007
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―Diping
      Zhou,
            
            2009
            
            $
            82,090
            
            
            $
            7,060
            
            
            $
            ―
            
            
            $
            274,861
            (6)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            364,011Vice
      President of
            
            2008
            
            $
            74,265
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            273,609
            (6)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            347,874Operations
            
            2007
            
            $
            27,500
            (7)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            62,795
            (6)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            90,295





(1)
            Reflects
      dollar amount expensed by the Company during the applicable fiscal year
      for financial statement reporting purposes pursuant to FAS
      123R.  FAS 123R requires the Company to determine the overall
      value of the options as of the date of grant based upon the Black-Scholes
      method of valuation, and to then expense that value over the service
      period over which the options become exercisable (vested).  As a
      general rule, for time in service based options, the Company will
      immediately expense any option or portion thereof that is vested upon
      grant, while expensing the balance on a pro rata basis over the remaining
      vesting term of the option.





(2)
            On
      August 8, 2007, Mr. Li was granted options to purchase an aggregate
      407,274 shares of our common stock at $2.80 per share, vesting at 33.33%
      per year.  Mr. Li’s options expire on August 8,
      2017.  We used the Cox-Ross-Rubinstein binomial model to value
      the options at the time they were issued, based on volatility of 70%,
      dividend yield of 0%, the stated exercise prices, and expiration dates of
      the instruments and using an average risk-free rate of
      4.5%.  Because we do not have a history of employee stock
      options, the estimated life is based on one-half of the sum of the vesting
      period and the contractual life of 10 years of the option.  This
      is the same as assuming that the options are exercised at the mid-point
      between the vesting date and expiration
date.





(3)
            This
      amount differs from Mr. Li’s base salary described below under “Employment
      Agreements” because Mr. Li had an oral agreement with Perfectenergy
      Shanghai after Perfectenergy Shanghai suffered first quarter losses, under
      which Mr. Li agreed to be paid 75% of his base salary.  This
      agreement only covered his 2007 salary through August 2007, and Mr. Li was
      paid 100% of his base salary starting in September
  2007.





(4)
            On
      February 1, 2008, Mr. Zhuang was granted options to purchase an aggregate
      125,000 shares of our common stock at $4.08 per share, vesting at 33.33%
      per year.  Mr. Zhuang’s options expire on February 1,
      2013.  We used the Cox-Ross-Rubinstein binomial model to value
      the options at the time they were issued, based on volatility of 70%,
      dividend yield of 0%, the stated exercise prices, and expiration dates of
      the instruments and using an average risk-free rate of
      4.5%.  Because we do not have a history of employee stock
      options, the estimated life is based on one-half of the sum of the vesting
      period and the contractual life of 5 years of the option.  This
      is the same as assuming that the options are exercised at the mid-point
      between the vesting date and expiration
date.





(5)
            This
      amount includes statutory benefits under PRC laws, including pension,
      housing, medical, and unemployment insurance
  benefits.





(6)
            On
      August 8, 2007, Ms. Zhou was granted options to purchase an aggregate
      196,488 shares of our common stock at $2.80 per share, vesting at 33.33%
      per year.  Ms. Zhou’s options expire on August 8,
      2017.  We used the Cox-Ross-Rubinstein binomial model to value
      the options at the time they were issued, based on volatility of 70%,
      dividend yield of 0%, the stated exercise prices, and expiration dates of
      the instruments and using an average risk-free rate of
      4.5%.  Because we do not have a history of employee stock
      options, the estimated life is based on one-half of the sum of the vesting
      period and the contractual life of 10 years of the option.  This
      is the same as assuming that the options are exercised at the mid-point
      between the vesting date and expiration
date.





(7)
            This
      amount differs from Ms. Zhou’s base salary described below under
      “Employment Agreements” because Ms. Zhou had an oral agreement with
      Perfectenergy Shanghai after Perfectenergy Shanghai suffered first quarter
      losses, under which Ms. Zhou agreed to be paid 80% of her base
      salary.  This agreement only covered her 2007 salary through
      August 2007, and Ms. Zhou was paid 100% of her base salary starting in
      September 2007.






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Grants of Plan-Based
Awards





There
were no plan-based awards granted during the year ended October 31, 2009 to any
named executive officer.




Employment
Agreements





The
Company entered into an Amended and Restated Employment Agreement with Xiaolin
Zhuang on December 29, 2008 for his services as Chief Executive Officer, which
agreement restated the Employment Agreement between Mr. Zhuang and Perfectenergy
Shanghai dated February 1, 2008.  Under his employment agreement, Mr.
Zhuang’s annual salary is RMB600,000 (approximately US$87,868).  He is
entitled to a bonus equal to one months’ salary payable during the Chinese New
Year holiday, which falls in either January or February of each year, following
each year of service, pro-rated for 2008.  Pursuant to the employment
agreement, Mr. Zhuang was issued options to purchase 125,000 shares of the
Company’s common stock at $4.08 per share under the Company’s 2007 Stock
Incentive Plan.  The options were granted on February 1, 2008 and
expire on February 1, 2013, and they vest according to the following schedule:
one-third on each of the first, second, and third anniversary of the grant
date.  In the event of termination, all vested options must be
exercised within six months of the termination date.  If Perfectenergy
Shanghai terminates Mr. Zhuang’s employment due to (i) Mr. Zhuang’s inability to
perform his duties due to a non-work related illness, (ii) Mr. Zhuang’s
inability to adequately perform his duties or his unwilling to perform his
duties, (iii) a corporate event such as a merger or acquisition of Perfectenergy
Shanghai, or (iv) a statutory reorganization or financial difficulties of
Perfectenergy Shanghai, Mr. Zhuang is entitled to one months’ salary for each
year of service.   The term of the employment agreement is three
years, and it may be renewed upon mutual agreement by the parties.





The
Company entered into an Employment Agreement with Wennan Li, which became
effective on September 2, 2008, for his services as the Company’s Chief
Executive Officer.  Mr. Li’s annual salary is RMB720,000
(approximately US$105,442).  The term of the employment agreement is
four years.





The
Company entered into an Employment Agreement with Diping Zhou, which became
effective on September 2, 2008, for her services as the Company’s Vice President
of Operations.  Ms. Zhou’s annual salary is RMB576,000 (approximately
US$84,358).  The term of the employment agreement is four
years.





Outstanding
Equity Awards as of October 31, 2009





Option
      Awards
            
            Stock
    AwardsName
            
            Number of
              Securities
              Underlying
              Unexercised
              Options
      (#)
              Exercisable
            
            Number of
              Securities
              Underlying
              Unexercised
              Options
      (#)
              Unexercisable
            
            Equity
              Incentive
              Plan
              Awards:
              Number of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
      (#)
            
            Option
              Exercise
              Price
      ($)
            
            Option
              Expiration
              Date
            
            Number of Shares
              or Units
      of Stock
              That
      HaveNot
      Vested (#)
            
            Market
              Value
      of
              Shares or
              Units of
              Stock
              That
              Have Not
              Vested
      ($)
            
            Equity
              Incentive
              Plan
      Awards:
              Number of
              Unearned
              Shares,
              Units, or
              Other
      Rights
              That
      Have Not
              Vested
      (#)
            
            Equity
              Incentive
              Plan Awards:
              Market or
              Payout Value
      of
              Unearned Shares, Units,
      or Other Rights That  Have Not
              Vested
      (#)Wennan
      Li
            
            271,516
            (1)
            135,758
            (1)
            ―
            
            $
            2.80
            
            8/8/17
            
            ―
            
            
            ―
            
            ―
            
            ―Xiaolin
      Zhuang
            
            41,667
            (2)
            83,333
            (2)
            ―
            
            $
            4.08
            
            2/1/13
            
            ―
            
            
            ―
            
            ―
            
            ―Diping
      Zhou
            
            130,992
            (1)
            65,496
            (1)
            ―
            
            $
            2.80
            
            8/8/17
            
            ―
            
            
            ―
            
            ―
            
            ―





(1)
            33.33%
      of this holder’s options vest(ed) on August 8, 2008, August 8, 2009, and
      August 8, 2010.


(2)
            33.33%
      of this holder’s options vest(ed) on February 1, 2009, February 1, 2010,
      and February 1, 2011.






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Director
Compensation





The
following table provides compensation information for our directors during the
fiscal year ended October 31, 2009:





Name
            
            Fees
              Earned or
              Paid in
              Cash ($)
            
            
            Stock
              Awards ($)
            
            
            Option
              Awards ($)
              (1)
            
            
            Non-Equity
              Incentive Plan
              Compensation ($)
            
            
            Non-Qualified
              Deferred
              Compensation
              Earnings ($)
            
            
            All Other
              Compensation
      ($)
            
            
            Total ($)Wennan
      Li (2)
            
            $
            7,300
            
            
            $
            ―
            
            
            $
            ―
            (2)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            7,300Min
      Fan
            
            $
            14,640
            
            
            $
            ―
            
            
            $
            71,147
            (3)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            85,787Yunxia
      Yang
            
            $
            14,640
            
            
            $
            ―
            
            
            $
            71,147
            (4)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            85,787Adam
      Roseman
            
            $
            60,000
            
            
            $
            ―
            
            
            $
            342,997
            (5)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            402,997Yajun
      Wu
            
            $
            14,640
            
            
            $
            ―
            
            
            $
            71,147
            (6)
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            85,787





(1)
            Reflects
      dollar amount expensed by the Company during applicable fiscal year for
      financial statement reporting purposes pursuant to FAS
      123R.  FAS 123R requires the Company to determine the overall
      value of the options as of the date of grant based upon the Black-Scholes
      method of valuation, and to then expense that value over the service
      period over which the options become exercisable (vested).  As a
      general rule, for time in service based options, the company will
      immediately expense any option or portion thereof which is vested upon
      grant, while expensing the balance on a pro rata basis over the remaining
      vesting term of the option.





(2)
            Mr.
      Li’s compensation as a director is reflected in the table titled “Summary
      Compensation Table” above.





(3)
            Mr.
      Fan had options to purchase an aggregate 50,000 shares of our common stock
      outstanding as of October 31, 2009.  We used the
      Cox-Ross-Rubinstein binomial model to value the options at the time they
      were issued, based on volatility of 70%, dividend yield of 0%, the stated
      exercise prices, and expiration dates of the instruments and using an
      average risk-free rate of 4.5%.  Because we do not have a
      history of employee stock options, the estimated life is based on one-half
      of the sum of the vesting period and the contractual life of 10 years of
      the option.  This is the same as assuming that the options are
      exercised at the mid-point between the vesting date and expiration
      date.





(4)
            Ms.
      Yang had options to purchase an aggregate 50,000 shares of our common
      stock outstanding as of October 31, 2009.  We used the
      Cox-Ross-Rubinstein binomial model to value the options at the time they
      were issued, based on volatility of 70%, dividend yield of 0%, the stated
      exercise prices, and expiration dates of the instruments and using an
      average risk-free rate of 4.5%.  Because we do not have a
      history of employee stock options, the estimated life is based on one-half
      of the sum of the vesting period and the contractual life of 10 years of
      the option.  This is the same as assuming that the options are
      exercised at the mid-point between the vesting date and expiration
      date.





(5)
            Mr.
      Roseman had options to purchase an aggregate 240,625 shares of our common
      stock outstanding as of October 31, 2009.  We used the
      Cox-Ross-Rubinstein binomial model to value the options at the time they
      were issued, based on volatility of 70%, dividend yield of 0%, the stated
      exercise prices, and expiration dates of the instruments and using an
      average risk-free rate of 4.5%.  Because we do not have a
      history of employee stock options, the estimated life is based on one-half
      of the sum of the vesting period and the contractual life of 10 years of
      the option.  This is the same as assuming that the options are
      exercised at the mid-point between the vesting date and expiration
      date.





(6)
            Mr.
      Wu had options to purchase an aggregate 50,000 shares of our common stock
      outstanding as of October 31, 2009.  We used the
      Cox-Ross-Rubinstein binomial model to value the options at the time they
      were issued, based on volatility of 70%, dividend yield of 0%, the stated
      exercise prices, and expiration dates of the instruments and using an
      average risk-free rate of 4.5%.  Because we do not have a
      history of employee stock options, the estimated life is based on one-half
      of the sum of the vesting period and the contractual life of 10 years of
      the option.  This is the same as assuming that the options are
      exercised at the mid-point between the vesting date and expiration
      date.





We
compensate Min Fan, Yunxia Yang, and Yajun Wu with RMB100,000 (approximately
$14,640) per annum each for their services as a director.  On November
29, 2007, Mr. Fan, Ms. Yang, and Mr. Wu each received options to purchase 50,000
shares of our common stock at $2.80 per share, of which 33.33% vests/vested on
the first, second, and third year anniversary of the grant date of such
options.





We are
party to a three-year agreement with Adam Roseman that expires on December 20,
2010 for his services as a director, under which he receives $5,000 per month as
compensation for his services.  On November 29, 2007, Mr. Roseman
received options to purchase 250,000 shares of our common stock at $2.80 per
share, of which 30% vested on the grant date and 70% vests on a monthly basis
over a period of two years from the grant date.  Mr. Roseman is
entitled to certain travel and administrative expenses in connection with his
services as a director and is provided liability insurance.




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Compensation
Committee Interlocks and Insider Participation





During
the fiscal year ended October 31, 2009, our Compensation Committee was comprised
of Min Fan, Wennan Li, and Yunxia Yang.  Mr. Fan serves as the
Chairman of the Compensation Committee.  During the fiscal year ended
October 31, 2009, Mr. Li also served as an executive officer of the
Company.





During
the fiscal year ended October 31, 2009:




(i)
            none
      of our executive officers served as a member of the compensation committee
      (or other board committee performing equivalent functions or, in the
      absence of any such committee, the entire board of directors) of another
      entity, one of whose executive officers served on our Compensation
      Committee;




(ii)
            none
      of our executive officers served as a director of another entity, one of
      whose executive officers served on our Compensation Committee;
      and




(iii)
            none
      of our executive officers served as a member of the compensation committee
      (or other board committee performing equivalent functions or, in the
      absence of any such committee, the entire board of directors) of another
      entity, one of whose executive officers served as a member of our Board of
      Directors.








ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.




Securities
Authorized for Issuance under Equity Compensation Plans





Please
see the section titled “Securities Authorized for Issuance under Equity
Compensation Plans” under Item 5 above.





Security
Ownership of Certain Beneficial Owners and Management




The
following table sets forth information regarding the beneficial ownership of our
common stock as of January 4, 2010 for each of our directors and officers; all
directors and officers as a group; and each person known by us to beneficially
own five percent or more of our common stock.




Beneficial
ownership is determined in accordance with SEC rules.  Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the shareholder’s name.  Unless otherwise indicated, the
address of each beneficial owner listed below is No. 479 You Dong Road,
Xinzhuang Town, Shanghai 201100, People’s Republic of China.





Name of Beneficial Owner and
      Address
            
            Number of Shares of
              Common Stock Beneficially
              Owned (1)
            
            
            Percent of Shares
      of
              Common Stock
              Beneficially Owned (1)(2)Executive
      Officers and/or Directors:Wennan
      Li
            
            
            6,666,735
            (3)
            
            
            22.30
            %Min
      Fan
            
            
            4,100,933
            (4)
            
            
            13.83
            %Yunxia
      Yang
            
            
            4,100,933
            (5)
            
            
            13.83
            %Diping
      Zhou
            
            
            202,480
            (6)
            
            
            *Xiaolin
      Zhuang
            
            
            83,333
            (7)
            
            
            *Adam
      Roseman (8)
            
            
            324,809
            (8)
            
            
            1.09
            %Yajun
      Wu
            
            
            33,333
            (9)
            
            
            *All
      Executive Officers and Directors as a Group
      (7 persons)
            
            
            15,512,556
            
            
            
            51.77
            %


_______________




* Less
than 1%




(1)
            Under
      Rule 13d-3, a beneficial owner of a security includes any person who,
      directly or indirectly, through any contract, arrangement, understanding,
      relationship, or otherwise has or shares: (i) voting power, which includes
      the power to vote, or to direct the voting of shares; and (ii) investment
      power, which includes the power to dispose or direct the disposition of
      shares.  Certain shares may be deemed to be beneficially owned
      by more than one person (if, for example, persons share the power to vote
      or the power to dispose of the shares).  In addition, shares are
      deemed to be beneficially owned by a person if the person has the right to
      acquire the shares (for example, upon exercise of an option) within 60
      days of the date as of which the information is provided.  In
      computing the percentage ownership of any person, the amount of shares
      outstanding is deemed to include the amount of shares beneficially owned
      by such person (and only such person) by reason of these acquisition
      rights.  As a result, the percentage of outstanding shares of
      any person as shown in this table does not necessarily reflect the
      person's actual ownership or voting power with respect to the number of
      shares of common stock actually
outstanding.





(2)
            The
      percentage of class beneficially owned is based on 29,626,916 shares of
      common stock outstanding on January 4,
2010.




(3)
            271,516
      of these shares represent the number of shares of common stock that Wennan
      Li has the right to acquire upon exercise of an option granted on August
      8, 2007.





(4)
            33,333
      of these shares represent the number of shares of common stock that Min
      Fan has the right to acquire upon exercise of an option granted on August
      8, 2007.





(5)
            33,333
      of these shares represent the number of shares of common stock that Yunxia
      Yang has the right to acquire upon exercise of an option granted on August
      8, 2007.





(6)
            130,992
      of these shares represent the number of shares of common stock that Diping
      Zhou has the right to acquire upon exercise of an option granted on August
      8, 2007.





(7)
            83,333
      of these shares represent the number of shares of common stock Xiaolin
      Zhuang has the right to acquire upon exercise of an option granted on
      February 1, 2008.(8)
            182,293
      of these shares represent the number of shares of common stock that Adam
      Roseman has the right to acquire upon exercise of an option granted on
      August 8, 2007.  142,516 of these shares are held in the name of
      Tapirdo Enterprises, LLC, of which Mr. Roseman is the manager and sole
      member. Mr. Roseman’s address is 9440 Little Santa Monica Blvd., Suite
      401, Beverly Hills, CA 90210.





(9)
            33,333
      of these shares represent the number of shares of common stock that Yajun
      Wu has the right to acquire upon exercise of an option granted on August
      8, 2007.






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ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE.





Related
Party Transactions





There are no related party transactions
to report.





Director
Independence




Our board
of directors has determined that it currently has 4 members who
qualify as “independent” as the term is used in Item 407 of Regulation S-K as
promulgated by the SEC and Nasdaq’s Marketplace Rule 5605(a)(2).  The
independent directors are Min Fan, Yunxia Yang, Adam Roseman, and Yajun
Wu.  All of the members of our Audit Committee qualify as
independent.  All of the members of each of our Nominating and
Compensation Committees qualify as independent, except for Wennan
Li.








ITEM 14.  PRINCIPAL ACCOUNTING FEES AND
SERVICES.





Frazer
Frost, LLP (successor entity of Moore Stephens Wurth Frazer and Torbet, LLP)
served as our independent registered public accounting firm for our fiscal years
ended October 31, 2009 and 2008.  The following table shows the fees
that were billed for audit and other services provided by this firm during the
fiscal years indicated:




Fiscal
      Year Ended October 31,2009
            
            
            2008Audit
      Fees (1)
            
            $
            180,000
            
            
            $
            125,000Audit-Related
      Fees (2)
            
            
            ―
            
            
            
            ―Tax
      Fees (3)
            
            
            12,000
            
            
            
            ―All
      Other Fees (4)
            
            
            ―
            
            
            
            ―Total
            
            $
            192,000
            
            
            $
            125,000





(1)
            Audit Fees – This
      category includes the audit of our annual financial statements, review of
      financial statements included in our Quarterly Reports on Form 10-Q, and
      services that are normally provided by independent auditors in connection
      with the engagement for fiscal years.  This category also
      includes advice on audit and accounting matters that arose during, or as a
      result of, the audit or the review of interim financial
      statements.





(2)
            Audit-Related Fees –
      This category consists of assurance and related services by our
      independent auditors that are reasonably related to the performance of the
      audit or review of our financial statements and are not reported above
      under "Audit Fees."  The services for the fees disclosed under
      this category include consultation regarding our correspondence with the
      SEC.





(3)
            Tax Fees – This category
      consists of professional services rendered by our independent auditors for
      tax compliance and tax advice.  The services for the fees
      disclosed under this category include tax return preparation and technical
      tax advice.





(4)
            All Other Fees – This
      category consists of fees for other miscellaneous
  items.




Pre-Approval
Policies and Procedures of the Audit Committee





Our
Audit Committee approves the engagement of our independent auditors and is also
required to pre-approve all audit and non-audit expenses.  In the
fiscal year ended October 31, 2009, 100%, 100%, and 100% of our Audit-Related
Fees, Tax Fees, and All Other Fees, respectively, were pre-approved by the Audit
Committee.





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PART IV





ITEM 15.  EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.





Financial
Statements; Schedules





Our
consolidated financial statements for the fiscal years ended October 31, 2009
and 2008 begin on page F-1 of this annual report.  We are not required
to file any financial statement schedules.





Exhibit
Table





Exhibit No.
            
            Description2.1
            
            Share
      Exchange Agreement between the Company, Perfectenergy International
      Limited, and the selling the stockholders of Perfectenergy International
      Limited, dated March 29, 2007 (2)2.2
            
            Amended
      and Restated Share Exchange Agreement between the Company, Perfectenergy
      International Limited, Crown Capital Partners, S.A., and the selling
      the stockholders of Perfectenergy International Limited, dated August 8,
      2007 (4)3.1
            
            Articles
      of Incorporation (1)3.2
            
            Bylaws (1)3.3
            
            Articles
      of Merger filed with the Secretary of State of Nevada on April 10, 2007
      (3)3.4
            
            Certificate
      of Change filed with the Secretary of State of Nevada on April 10, 2007
      and effective on April 16, 2007 (3)3.5
            
            Certificate
      of Change filed with the Secretary of State of Nevada on March 6, 2008 and
      effective March 17, 2008 (7)4.1
            
            Form
      of Warrant (4)10.1
            
            Premises
      Lease Agreement (English translation) (5)10.2
            
            Letter
      of Agreement from the Company to Adam Roseman, dated December 20, 2007
      (6)10.3
            
            Approval
      of Extended Term of Validity of Land Purchase Confirmation issued by the
      Administration of Housing and Land of Minxing District, Shanghai to
      Perfectenergy Solar-Tech (Shanghai) Ltd., dated December 18, 2008 (English
      translation) (11)10.4
            
            Monocrystalline
      Silicon Modular Long Term Supply Contract between Tianjin Huan-ou
      Semiconductor Technology Inc. Ltd. and Perfectenergy (Shanghai) Co., Ltd.,
      dated July 20, 2008 (English translation) (8)10.5
            
            Amended
      and Restated Employment Agreement between Xiaolin Zhuang and Perfectenergy
      International Limited, dated December 29, 2008 (11)10.6
            
            Sales
      Contract between Perfectenergy (Shanghai) Co., Ltd. and Proinso S.A.,
      dated March 3, 2008  (11)10.7
            
            Sales
      Contract between Perfectenergy GmbH and Heltron GmbH, dated May 22, 2008
      (11)10.8
            
            Lease
      Agreement between Shanghai Changlong Industry Co. and Perfectenergy
      Solar-Tech (Shanghai) Ltd., dated March 11, 2008  (English
      translation) (11)10.9
            
            Leasing
      Contract between Tannenweg 10 Vermögensverwaltung GbR and Perfectenergy
      GmbH, dated October 3, 2007(English
      translation) (11)10.10
            
            Addendum
      of the Tenancy Contract between Tannenweg 10 Vermögensverwaltung GbR and
      Perfectenergy GmbH, dated January 25, 2008 (English translation)
      (11)10.11
            
            Employment
      Agreement between the Company and Wennan Li, dated January 16, 2009 and
      effective September 2, 2008 (11)10.12
            
            Employment
      Agreement between the Company and Diping Zhou, dated January 16, 2009 and
      effective September 2, 2008 (11)10.13
            
            Sales
      Contract between ABIDAS AG and Perfectenergy (Shanghai) Co., Ltd., dated
      January 8, 2009 (Portions of this exhibit have been omitted pursuant to a
      request for confidential treatment.) (9)10.14
            
            Monocrystalline
      Silicon Modular Long Term Supply Supplemental Agreement between Tianjin
      Huan-ou Semiconductor Technology Inc. Ltd. and Perfectenergy (Shanghai)
      Co., Ltd., dated January 21,  2009 and effective January 1, 2009
      (English translation) (10)10.15
            
            Long
      Term Supply Contract between Perfectenergy (Shanghai) Co., Ltd. and
      Chengdu Jiayang Silicon Materials Technology Co., Ltd., dated January 8,
      2010 (English translation) *10.16
            
            Salary
      Adjustment Letter for Diping Zhou, dated March 1, 2009
    (13)14.1
            
            Code
      of Business Conduct and Ethics (11)16.1
            
            Letter
      from Moore Stephens Wurth Frazer and Torbet, LLP to the U.S. Securities
      and Exchange Commission, dated January 7, 2010 (12)21.1
            
            List
      of Subsidiaries (11)31.1
            
            Section
      302 Certificate of Chief Executive Officer *31.2
            
            Section
      302 Certificate of Chief Financial Officer *32.1
            
            Section
      906 Certificate of Chief Executive Officer *32.2
            
            Section
      906 Certificate of Chief Financial Officer *





* Filed
herewith.




(1)
            Filed
      on December 8, 2005 as an exhibit to the Company’s Registration Statement
      on Form SB-2 and incorporated herein by
  reference.





(2)
            Filed
      on April 5, 2007 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(3)
            Filed
      on April 19, 2007 as an exhibit to the Company’s Current Report on Form
      8-K and incorporated herein by
reference.




(4)
            Filed
      on August 13, 2007 as an exhibit to the Company’s Current Report on Form
      8-K and incorporated herein by
reference.




(5)
            Filed
      on November 23, 2007 as an exhibit to the Company’s Amendment No. 1 to
      Registration Statement on Form SB-2 and incorporated herein by
      reference.





(6)
            Filed
      on January 22, 2008 as an exhibit to the Company’s Amendment No. 2 to
      Registration Statement on Form SB-2 and incorporated herein by
      reference.




(7)
            Filed
      on March 21, 2008 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.





(8)
            Filed
      on November 5, 2008 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.





(9)
            Filed
      on January 14, 2009 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.




(10)
            Filed
      on January 23, 2009 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.





(11)
            Filed
      on January 26, 2009 as an exhibit to our Annual Report on Form 10-K and
      incorporated herein by reference.





(12)
            Filed
      on January 7, 2010 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.




(13)
            Filed
      on January 29, 2010 as an exhibit to our Current Report on Form 8-K and
      incorporated herein by reference.




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SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





PERFECTENERGY
      INTERNATIONAL LIMITEDDate:
      January 29, 2010
            /s/
      Wennan LiWennan
      Li, Chief Executive Officer and President







In
accordance with the Securities Exchange of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.





NAME
            
            TITLE
            
            DATE/s/
      Wennan Li
            
            Chairman
      of the Board, Chief Executive Officer (Principal Executive Officer), and
      President
            
            January
      29, 2010Wennan
      Li/s/
      Xiaolin Zhuang
            
            Chief
      Financial Officer (Principal Financial and Accounting Officer) and
      Secretary
            
            January
      29, 2010Xiaolin
      Zhuang/s/
      Diping Zhou
            
            Vice
      President of Operations
            
            January
      29, 2010Diping
      Zhou/s/
      Min Fan
            
            Director
            
            January
      29, 2010Min
      Fan/s/
      Yunxia Yang
            
            Director
            
            January
      29, 2010Yunxia
      Yang/s/
      Adam Roseman
            
            Director
            
            January
      29, 2010Adam
      Roseman/s/
      Yajun Wu
            
            Director
            
            January
      29, 2010Yajun
      Wu