UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q


(Mark One)x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE QUARTERLY PERIOD ENDED May 31, 2011o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM __________ TO __________



COMMISSION FILE NUMBER: 333-148005





XODTEC LED, INC.


(Exact name of registrant as specified in its charter)





Nevada

20-8009362(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





2F, No.139, Jian 1st Rd., Jhonghe City,


Taipei County 235, Taiwan (R.O.C.)


(Address of principal executive offices, Zip Code)





011-886-2-2228-6276


(Registrant’s telephone number, including area code)





Copies to:


Asher S. Levitsky P.C.


Ellenoff Grossman & Schole LLP


120 East 42nd Street; 11th floor


New York, New York 10017


Phone: (212) 370-1300


Fax: (646) 895-7182


E-mail: alevitsky@egsllp.com





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





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





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





Large accelerated filer   o
Accelerated filer             oNon-accelerated filer      o
Smaller reporting companyx





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





The number of shares of registrant’s common stock outstanding, as of July 19, 2011: 30,864,827





XODTEC LED, INC.


Form 10-Q


For the Quarter Ended May 31, 2011





TABLE OF CONTENTS





PagePART I. - FINANCIAL INFORMATIONItem 1.
Financial StatementsConsolidated Balance Sheets as of May 31, 2011 (unaudited)  and February 28, 2011 (audited)
3Consolidated Statements of Operations and Comprehensive Income for the three months ended May 31, 2011 and 2010 (unaudited)
4Consolidated Statements of Cash Flows for the three months ended May 31, 2011 and 2010 (unaudited)
5Notes to Unaudited Consolidated Financial Statements.
6Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
14Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
19Item 4.
Controls and Procedures.
19PART II - OTHER INFORMATIONItem 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
21Item 6.
Exhibits.
21





1





FORWARD LOOKING STATEMENTS





This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.





Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our report on Form 10-K for the year ended February 28, 2011 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC.   You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.





We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.





We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.





2





PART 1 - FINANCIAL INFORMATION


XODTEC LED, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 May 31, 2011


February 28, 2011ASSETSCurrent assetsCash and cash equivalents

$
33,392


$
35,652Notes receivable, net


60,836



66,708Accounts receivable, net


112,067



119,008Other receivables


81,281



84,753Inventories, net


334,079



-Prepayments


127,854



340,631Other current assets


56,008



42,217Total current assets


805,517



688,969Property and equipment, net


106,039



109,642Other AssetsDeposits


61,317



61,060Deferred assets


340,976



505,944Other assets


197,883



170,964Total assets

$
1,511,732


$
1,536,579LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilitiesShort-term borrowings

$
242,312


$
232,969Notes payable


12,927



151Accounts payable


197,637



289,517Other payable


474,268



471,620Accrued liabilities


608,628



445,611Due to related parties


2,782,521



2,355,473Other current liabilities


53,937



259,006Total current liabilities


4,372,230



4,054,348Long-term liability


4,016



9,930Total liabilities


4,376,246



4,064,278Commitments and contingenciesStockholders' deficitPreferred stock, par value $0.001 per share, 10,000,000 sharesauthorized and 0 shares issued and outstanding


-



-Common stock( 225,000,000 authorized shares, par value $0.001 per share; 28,864,827 and 28,864,827 issued and outstanding, respectively)


28,865



28,865Subscription receivable


(130,000
)


(130,000
)Additional paid in capital


3,559,507



3,639,507Accumulated deficit


(6,111,816
)


(5,684,006
)Accumulated other comprehensive gain - translation adjustments


(211,070
)


(382,065
)Total stockholders' deficit


(2,864,514
)


(2,527,699
)Total liabilities and stockholders' deficit

$
1,511,732


$
1,536,579
 The accompanying notes are an integral part of the financial statements.
 
 3
  XODTEC LED, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
 Three months ended May 31,2011


2010Revenue

$
227,708


$
243,785Cost of revenueCost of good sold


182,071



175,479Reversal of inventory writedown


(335,681
)


-(153,610
)


175,479Gross profit


381,318



68,306Selling, general and administrative expenses


806,937



685,398Net operating loss


(425,619
)


(617,092
)Other income (expense)Interest expense


(1,500
)


(696
)Gain (loss) on exchange


693



(82
)Gain on change in fair value of accrued derivative liabilities


-



615,209Other income (expense)


(1,354
)


3,431Total other income (loss)


(2,161
)


617,862Net income (loss) before income taxes


(427,780
)


770Income taxes


30



-Net income (loss)

$
(427,810
)

$
770Translation adjustments


170,995



(10,366
)Comprehensive income

$
(256,815
)

$
(9,596
)Net income (loss) per share- Basic

$
(0.01
)

$
0.00- diluted

$
(0.01
)

$
0.00Weighted average common shares outstanding- Basic and


28,864,827



22,676,705- diluted


28,864,827



22,676,705
 The accompanying notes are an integral part of the financial statements.
 
 * Weighted average number of shares used to compute basic and diluted loss per share is the same as the effect of dilutive securities are anti dilutive.
 4
 
 XODTEC LED, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three months ended May 31,2011


2010Cash Flows from operating activities:Net income (loss)

$
(427,810
)

$
770Adjustments to reconcile net income to net cashused in operating activities:Depreciation and amortization


12,474



25,827Issuance of common shares or warrants and amorization of professional services


290,667



82,625Reversal of inventory writedown


(335,681
)


-(Gain) on change in fair value of accrued derivative liabilities


-



(615,209
)(Increase) Decrease in assets:Notes receivable


6,096



18,272Accounts receivable


7,372



(52,667
)Other receivables


3,793



(4,258
)Inventories


4,735



(51,981
)Prepayments


1,619



(12,551
)Other current assets


(13,484
)


(5,498
)Deposits


-



(3,246
)Decrease (Increase) in liabilities:Accounts payable


(92,228
)


3,247Notes payable


12,656



(68,239
)Other payable


652



4,362Accrued liabilities


159,625



45,845Other current liabilities


(19,738
)


3,605Net cash used in operating activities


(389,252
)


(629,096
)Cash Flows from Investing activities:Increase in restricted cash


-



(26,996
)Increase in deferred assets


-



(14,591
)Prepayment of property and equipment


(25,952
)


-Purchase of property and equipment


(2,765
)


(129,105
)Net cash used in investing activities


(28,717
)


(170,692
)Cash flows from financing activities:Proceeds from borrowings


2,381



23,316Proceeds from loans from related parties


413,200



(146,694
)Proceeds from issuance of shares


-



805,724Net cash provided by financing activities


415,581



682,346Effect of exchange rate changes on cash and cash equivalents


128



1,378Net increase in cash and cash equivalents


(2,260
)


(116,064
)Cash and cash equivalents, beginning of the year


35,652



255,884Cash and cash equivalents, end of the year

$
33,392


$
139,820Supplemental disclosures of cash flow information:Interest paid

$
1,500


$
696Income taxes paid

$
-


$
-
 
 The accompanying notes are an integral part of the financial statements.
  5


XODTEC LED, INC. AND SUBSIDIARIES


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


May 31, 2011





NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION





Xodtec LED, Inc.  (“Company”) is a Nevada corporation incorporated on November 29, 2006, under the name Sparking Events, Inc.  On June 28, 2009, the Company’s corporate name was changed to Xodtec Group USA, Inc., and on May 17, 2010 the Company’s corporate name was changed to Xodtec LED, Inc.





The Company, through its subsidiaries, is engaged in the design, marketing and selling of advanced lighting solutions which are designed to use less energy and have a longer life than traditional incandescent, halogen, fluorescent light sources.  The Company’s wholly-owned subsidiaries, Xodtec Technology Co., Ltd. (“Xodtec”); Targetek Technology Co., Ltd. (“Targetek”); UP Technology Co., Ltd. (“UP”), are organized under the laws of the Republic of China (Taiwan).  The Company also owns a 35% interest in Radiant Sun Development S.A., a company organized under the laws of the Independent State of Samoa (“Radiant Sun”).





On April 1, 2009, in anticipation of the exchange agreement described in the following paragraph, APlus International, Ltd., a Nevada limited liability company (“APlus”), acquired all of the capital stock of Xodtec, Targetek and UP, pursuant to agreements with the shareholders of each of these companies (The application of domestic investment by foreign nationals governed by the Investment Commission of the Republic of China is still in the process ) and acquired a 35% interest in Radiant Sun pursuant to an agreement with the holders of 35% of the capital stock of Radiant Sun.  As a result of these agreements, the former shareholders of Xodtec, Targetek and UP and the former holders of 35% of the stock of Radiant Sun were the sole members of APlus.





On April 20, 2009, the Company entered into an exchange agreement with APlus and its members pursuant to which the Company, then known as Sparking Events, Inc., acquired all of the stock of Xodtec, Targetek and UP and APlus’ 35% interest in Radiant Sun in exchange for 16,000,002 shares of common stock.  The transaction pursuant to which the Company issued 16,000,002 shares of common stock to the former members of APlus in exchange for all of the stock of Xodtec, Targetek and UP and APlus’ 35% interest in Radiant Sun is referred to as the reverse acquisition.





Simultaneously with the reverse acquisition, the Company’s then principal stockholder transferred to the Company for cancellation, without consideration, 27,000,000 shares of common stock owned by him.





At the time of the reverse acquisition, the Company was a blank check shell company and was not engaged in any business.  Upon completion of the reverse acquisition, the Company’s business became the business of Xodtec, Targetek and UP.  Radiant Sun did not have any operations prior to the reverse acquisition and does not currently have any operations.





Under generally accepted accounting principles, the acquisition by the Company of Xodtec, Targetek and UP is equivalent to the acquisition by APlus of the Company, then known as Sparking Events, Inc., with the issuance of stock by APlus for the net monetary assets of the Company.  This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure.  Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse acquisition accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, APlus.   Since APlus was organized to acquire Xodtek, Targetek and UP on April 1, 2009, and had no operations, the Company’s historical financial statements reflect the operations of Xodtek, Targetek and UP prior to April 1, 2009, the combined operations of APlus, Xodtek, Targetek and UP from April 1, 2009 to April 20, 2009, and the combined operations of these companies and the Company from April 20, 2009.  The accompanying financial statements reflect the recapitalization of the shareholders’ equity as if the transactions occurred as of the beginning of the first period presented.  Thus, only the 16,000,002 shares of common stock issued to the former APlus members are deemed to be outstanding for all periods reported prior to the date of the reverse acquisition.   The 1,380,000 shares of common stock that were outstanding on April 20, 2009, after giving effect to the cancellation of the 27,000,000 shares that were acquired by the Company and cancelled, are treated as if they were issued on April 20, 2009, as part of a recapitalization.





The Company has the following operating subsidiaries:





-
Xodtec Technology Co., Ltd., was set up on February 5, 2005 is mainly engaged in LED lighting ODM/OEM and distribution in Taiwan business.-
UP Technology Co., Ltd., was set up on January 9, 1997 and is mainly engaged in LED lighting product distribution in Taiwan business.-
Targetek Technology Co., Ltd., was set up on March 26, 1997 and is mainly engaged in professional translation business.





6





The Company’s authorized capital stock consists of 10,000,000 shares of preferred stock, par value $0.0001 per share, and 225,000,000 shares of common stock, par value $0.001 per share.  The board of directors has broad discretion in determining the rights, preferences and privileges of the holders of one or more series of preferred stock. The Company changed the par value of its preferred stock from $0.0001 to $0.001 on March 31, 2010 and restored the 10,000,000 shares of preferred stock which had previously been designated as series A convertible preferred stock to the status of authorized and unissued shares of preferred stock with no designation as to class or series.





NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation





The accompanying unaudited interim condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles (“GAAP”) for interim financial reporting.. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. These interim financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended February 28, 2011. In the opinion of management, the interim financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented. The operating results and cash flows for the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.





Use of Estimates





The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.





Segment Information





ASC 280 requires companies to report information about operating segment in interim and annual financial statements. It also requires segment disclosures about products and services geographic and major customers. The Company has determined that it does not have any separately reportable operating segments.





Revenue Recognition





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





Cost of Revenue





The cost of revenue represents, primarily, the cost of manufacturing by third party manufacturers based on a contract price, as well as warehousing costs, shipping and handling costs, and any cost related inventory adjustment, including write downs for excess and obsolete inventory.  During the three months ended May 31, 2011, cost of revenue also includes the reversal of a previously taken inventory writedown.




Shipping and Handling Costs





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


7


Accounts Receivable





Accounts receivable are carried at original invoice amount less the allowance for doubtful accounts based on a review of all outstanding amounts at year end. Management determines the allowance for doubtful accounts by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Allowance for doubtful accounts amounted to $33,168 and $33,028 at May 31, 2011 and February 28, 2011, respectively.





Inventories





The Company’s inventories are stated at the lower-of-cost-or-market price.  Cost is determined on the weighted average method. The Company provides for a lower-of-cost-or-market adjustment against gross inventory values. The Company recorded approximately$266,557 and $602,872 of inventory valuation reserve for LCM inventory adjustments for the nine months ended May 31, 2011 and February 28, 2011, respectively.





Equity Investment





The Company accounts for its interest in its equity investments pursuant to ASC 323 “Investment – Equity Method and Joint Ventures,” which sets forth guidance as to the treatment of equity investments. Because the Company only unconsolidated subsidiary is inactive, does not meet the test of a significant subsidiary under Rule 1-02(w)of Regulation S-X and any summarized information is de minimus, the Company is not required to include summarized financial information with respect to this entity and the absence of summarized financial information does not impact its consolidated financial statements.





Property and Equipment





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





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





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





Useful Lives (Years)Transportation

5 yearsOffice equipment

3-6 yearsMachinery

3-6 yearsEquipments for leases

12 yearsOther equipment

3-6 years





Impairment of Long-Lived Assets





The Company accounts for the impairment and disposition of long-lived assets in accordance with ASC 360, Property, Plant and Equipment. The Company periodically evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset were less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.





The assumptions used by management in determining the future cash flows are critical. In the event these expected cash flows are not realized, future impairment losses may be recorded.


8





Accrued Derivative Liabilities





The Company applies ASC Topic 815, “Derivatives and Hedging,” which provides a Monte Carlo Simulation model to determine the instruments issued pursuant to the subscription agreement not indexed to an issuer’s own stock and thus able to qualify for derivative liabilities treatment. The Company determines which instruments require liability accounting, and records the fair values as an accrued derivative liability. The changes in the values of the accrued derivative liabilities are shown in the accompanying statement of operations as “gain on change in fair value of accrued derivative liabilities.” During the year ended February 28, 2010, the Company determined that there were derivatives and accrued derivative liabilities. During the year ended February 28, 2011, the conditions that gave rise to the derivative liability terminated and at February 28, 2011, there was no longer any derivative liability.  The changes in the value of these derivatives are shown in the accompanying statement of operations as “gain on change in fair value of accrued derivative liabilities.”  The gain in change in fair value of derivative liabilities for the three months ended May 31, 2011 and 2010 was $0 and $615,209, respectively.  There was no derivative liability at February 28, 2011 or May 31, 2011.





Subscription Receivable





The subscription receivable reflects the sale of common stock in July 2009 for which the Company had not received payment as of May 31, 2011 or February 28, 2011.The Company is continuing communicate with this investor and anticipates that it will receive payment in July 2011.





Income Taxes





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





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





Net Loss per Share





The Company calculates its basic and diluted earnings per share in accordance with ASC 260. Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive warrants and options and convertible securities. There were no convertible securities outstanding during the three months ended May 31, 2011.  The Company uses the treasury stock method to reflect the potential dilutive effect of the unvested stock options and unexercised warrants. Because the Company incurred losses for the three months ended May 31, 2011, the number of basic and diluted shares of common stock is the same since any effect from outstanding warrants would be anti-dilutive.





Gain (Loss) on Exchange





Foreign-currency transactions are recorded in New Taiwan dollars (“NTD”) at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into NTD, or when foreign-currency receivables or payables are settled, are credited or charged to income in the year of conversion or settlement. On the balance sheet dates, the balances of foreign-currency assets and liabilities are restated at the prevailing exchange rates and the resulting differences are charged to current income.





Translation Adjustment





The Company’s financial statements are presented in the U.S. dollar ($), which is the Company’s reporting and functional currency. The functional currency of the Company’s subsidiaries is NTD. Transactions in foreign currencies are initially recorded at the functional currency rate prevailing at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange prevailing at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of operations.




9




In accordance with ASC 830, Foreign Currency Matters, the Company translates the assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation from NTD into U.S. dollar are recorded in stockholders’ equity as part of accumulated other comprehensive income. The exchange rates used for interim financial statements in accordance with ASC 830, Foreign Currency Matters, are as follows:





Average Rate for the

three monthsMay 31,

2011


2010Taiwan dollar (NTD)

NTD 29.97079


NTD 31.73182United States dollar ($)

$
1.00000


$
1.00000
 Exchange Rate atMay 31,


2011



2010Taiwan dollar (NTD)

NTD 29.68975


NTD 32.65000United States dollar ($)

$
1.0000


$
1.0000





Comprehensive Income (Loss)





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





Share Based Expense





ASC 718 requires a public entity to expense the cost of employee and non-employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements.  The Company expenses share-based costs in the period incurred.





NOTE 3 - GOING CONCERN MATTERS





The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the three months ended May 31, 2011, the Company incurred a net loss of approximately $0.4 million and an operating loss of approximately $0.4 million.  The Company had a negative cash flow in operating activities amounting approximately $0.4 million in the three months ended May 31, 2011, and the Company’s accumulated deficit was approximately $6 million as of May 31, 2011. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company may seek additional funding through additional issuance of common stock and/or borrowings from financial institutions and defer the amounts due under the credit line, however, the Company has relied primarily on loans from its directors. Management believes that actions presently being taken to obtain additional funding could provide the opportunity for the Company to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.





NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS





The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.





NOTE 5 – INVENTORIES





As of May 31, 2011 and February 28, 2011, the Company’s inventory consisted of raw material, work in progress and finished goods as follows:





May 31,

2011


February 28,

2011Raw material

$
346,566


$
199,757Work-in-process


66,428



77,015Finished goods


187,642



326,100Gross inventory

$
600,636


$
602,872Less amount to reduce inventories to lower of cost or market


(266,557
)


(602,872
)Net inventory

$
334,079


$
-





10





NOTE 6 – PROPERTY AND EQUIPMENT





Property and equipment consisted of the following:





May 31,

2011


February 28,

2011Transportation

$
1,691


$
1,684Office equipment


107,249



104,019Machinery


52,523



52,303Total property and equipment


161,463



158,006Accumulated depreciation


(55,424
)


(48,364
)Total property and equipment, net

$
106,039


$
109,642





Depreciation and amortization expenses during the three months ended May 31, 2011 and 2010 were $12,474 and $25,827, respectively.





NOTE 7 – DEFERRED ASSETS





Deferred assets consisted of the following:





May 31,

2011


February 28,

2011Long-term prepaid professional fee

$
302,541


$
461,958Other long-term prepaid expenses


38,435



43,986Total deferred assets

$
340,976


$
505,944








NOTE 8 – OTHER ASSETS





Other assets consisted of the following:





May 31,

2011


February 28,

2011Idle asset

$
171,685


$
170,964Prepayment of property and equipment


26,198



-Total other assets

$
197,883


$
170,964





Idle asset is reported at the lower of the carrying amount or fair values less cost to sell. As of May 31, 2011, the net realizable value of this idle asset was $171,685. This equipment has been used for Energy saving contract, which has been terminated, and this equipment will not have other usage. The Company has other payable regarding this equipment as of May 31, 2011 and February 28, 2011 was $472,886 and $470,899, respectively.





NOTE 9 – SHORT-TERM BORROWINGS





Short-term borrowings consisted of the following at May 31, 2011 and February 28, 2011:





May 31,

2010


February 28,

2011From First Bank, interest at 4.94%, maturity date July 1, 2012

$
27,397


$
32,921Unrelated party loan, free interest and due on demand


16,841



23,478Related party loan, interest at 1.00%, maturity date April 20, 2011


-



186,500Related party loan, free interest and due on demand


202,090Total


246,328



242,899Current portion

$
242,312


$
232,969Long-term portion

$
4,016


$
9,930


11


NOTE 10 – RELATED PARTY TRANSACTIONS





-
Due to related parties





As of May 31, 2011 and February 28, 2011, the Company had outstanding borrowings from





-
its CEO in the aggregate amounts of $822,358 and $804,821, respectively,-
one of its directors in the aggregate amounts of $1,907,956 and $1,498,665, respectively,-
one shareholder in the aggregate amounts of $52,207 and $51,987, respectively.





The borrowings were used for general working capital needs, and they do not bear interest and are payable on demand.





NOTE 11 - COMMITIMENTS AND CONTINGENCIES





The Company rent offices under several operating leases. The Company minimum rent for the future is following as:





Twelve months ending

AmountsMay 31, 2012

$
152,029May 31, 2013

$
18,182





The Company restated its financial statements at February 28, 2009 and for the year then ended, and will restate the financial statements for each quarter in the fiscal year ended February 28, 2010.  The Company cannot determine whether it will incur any liability as a result of such restatement.





NOTE 12 – CAPITAL STOCK AND SHARE-BASED PAYMENTS





Warrant activity for the year ended May 31, 2011 and February 28, 2011, is summarized as follows:





Shares subject to

Warrants


Weighted Average

Exercise PriceBalance at February 28, 2010

2,550,000


$
1.35Granted

-Exercised

-Cancelled

(1,000,000
)


1.50Forfeited or expired

-Balance at February 28, 2011

1,550,000



1.26Granted


-Exercised


-Cancelled


-Expired


(1,500,000
)

$
1.26Balance at May 31, 2011


-


$
-




12





NOTE 13 - CONCENTRATION





-
Major customers





The following table provides information as to sales to each customer who accounted for at least 10% of the Company’s revenue for the three months ended May 31, 2011 and 2010, respectively, and the accounts receivable from such customers:





Revenue

Three Months Ended May 30,


Percentage of

Total Revenue


Accounts Receivable

At May 30,2011-Customer A

$
45,463



19
%

$
48,188-Customer B


28,959



12
%


7,0412010No customer accounted for 10% or more of the Company’s revenue for the three months ended May 31, 2010.





Substantially all of the Company's revenue is derived from sales of LED lighting products.  Any significant decline in market acceptance of the Company's products or in the financial condition of the Company's existing customers could impair the Company's ability to operate effectively.





-
Major suppliers





The following table provides information as to purchase to each major supplier who accounted for 10% or more of the Company’s purchases for the three months ended May 31, 2011 and 2010, respectively, and the accounts payable to such suppliers:





Purchase

Three months Ended May 31,


Accounts /Notes Payable

At May 31,2011-Vendor A

$
69,935


$
67,938-Vendor C


20,820



22,0682010-Vendor A


14,807



--Vendor B


14,545



6,292





NOTE 15 – INCOME TAXES





The Company did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because the Company has experienced operating losses for U.S. federal income tax purposes since inception. When it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit.  The Company pays income taxes under the laws of the Republic of China (Taiwan).  For the nine months ended November 30, 2010 and 2009, there were no income tax expenses.





NOTE 16 - OTHER COMPREHENSIVE INCOME (LOSS)





Balances of related after-tax components comprising accumulated other comprehensive loss, included in stockholders’ equity and at May 31, 2011 and February 28, 2011 are as follows:








Foreign Currency Translation AdjustmentBalance at February 28, 2011

$
(382,065)Change for three month periods ended


170,995Balance at May 31, 2011

$
(211,070)





NOTE 17 - SUBSEQUENT EVENTS





On July 1, 2011, the Company issued 2,000,000 shares of common stock to a director in exchange for the cancellation of $200,000 of notes due to the director.


13




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





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





Overview





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





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





Our ability to be successful is dependent upon our ability to offer customers lighting solutions that require our know-how in designing a system to meet the specific needs of the customer at a cost which is acceptable to the customer.  To the extent that stand-alone LED products are commodities with the customer looking solely to price, we will need to distinguish ourselves by offering solutions which include the LED product is an element.  At present, our gross margin on LED products is significantly less than our gross margin on project-based lighting solutions.  During the quarter ended May 31, 2011, our gross margin was 20.04%, as compared with 28.0% for the fiscal first quarter ended May 31, 2010, primarily because we have experienced an increase in LED product sales which yield lower margins than LED project sales.  To the extent that we offer low prices for the LED products and are not able to combine the low prices for the LED prices with a project which also requires our services, our ability to operate profitably will be impaired, especially to the extent that LED users do not seek services as part of a project.  We cannot assure you that we will be successful in marketing projects which require our know-how in the design of a lighting solution.





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





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





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





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


14


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





Significant Accounting Estimates and Policies





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





Revenue Recognition





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





Cost of Revenue





The cost of revenue represents, primarily, the cost of manufacturing by third party manufacturers based on a contract price, as well as warehousing costs, shipping and handling costs, and any cost related inventory adjustment, including write downs for excess and obsolete inventory.  During the three months ended May 31, 2011, cost of revenue also includes the reversal of a previously taken inventory writedown.




Shipping and Handling Costs





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





Accrued Derivative Liabilities





The Company applies ASC Topic 815, “Derivatives and Hedging,” which provides a Monte Carlo Simulation model to determine the instruments issued pursuant to the subscription agreement not indexed to an issuer’s own stock and thus able to qualify for derivative liabilities treatment. The Company determines which instruments require liability accounting, and records the fair values as an accrued derivative liability. The changes in the values of the accrued derivative liabilities are shown in the accompanying statement of operations as “gain on change in fair value of accrued derivative liabilities.” During the year ended February 28, 2010, the Company determined that there were derivatives and accrued derivative liabilities. During the year ended February 28, 2011, the conditions that gave rise to the derivative liability terminated and at February 28, 2011, there was no longer any derivative liability.  The changes in the value of these derivatives are shown in the accompanying statement of operations as “gain on change in fair value of accrued derivative liabilities.”  The gain in change in fair value of derivative liabilities for the three months ended May 31, 2011 and 2010 was $0 and $615,209, respectively.  There was no derivative liability at February 28, 2011 or May 31, 2011.





Comprehensive Income





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


15





Income Taxes





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





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





Inventories





The Company’s inventories are stated at the lower-of-cost-or-market price.  Cost is determined on the weighted average method. The Company provides for a lower-of-cost-or-market adjustment against gross inventory values. The Company recorded approximately$266,557 and $602,872 of inventory valuation reserve for LCM inventory adjustments for the nine months ended May 31, 2011 and February 28, 2011, respectively.





Property, Plant and Equipment





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





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





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





Useful Lives (Years)Transportation
5 yearsOffice equipment
5 yearsMachinery
3-6 yearsEquipment for leases
12 yearsOther equipment
3-6 years





Research and development





Research and development costs are expensed as incurred, and are included in general and administrative expenses. These costs primarily consist of cost of material used and salaries paid for the development of our products and fees paid to third parties. Our total research and development expense for the three month periods ended May 31, 2011 and 2011 was not significant.





Recent accounting pronouncements





In April 2010, the FASB issued an Accounting Standard Update (“ASU”) No. 2010-17, “Revenue Recognition – Milestone Method (Topic 605)”, which provides guidance on defining milestones under Topic 605 and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development deliverables in an arrangement in which one or more payments are contingent upon achieving uncertain future events or circumstances. ASU 2010-17 shall be applied prospectively to milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial position or results of operation.


16




The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.





Results of Operations





Three months ended May 31, 2011 and 2010





The following table sets forth the results of our operations for the three months ended November 30, 2010 and 2009 in dollars and as a percentage of revenues:





Three Months Ended May 31,2011


2010Dollars


%


Dollars


%Revenues

$
227,708



100.0
%

$
243,785



100.0
%Cost of sales


182,071



80.0
%


175,479



72.0
%Reversal of inventory writedown


(335,681
)


(147.4
)%


0



0
%Total cost of revenue


153,610



67.5
%


175,479



72.0
%Gross profit


381,318



167.5
%


68,306



28.0
%Selling, general and administrative expenses


806,937



354.4
%


685,398



281.1
%Operating income (loss)


(425,619
)


(186.9
)%


(617,092
)


(253.1
)%Interest expense, net


(1,500
)


(0.7
)%


(696)



(0.3
)%Gain(Loss) on exchange


693



(0.3
)%


(82)



0.0
%Gain on change in fair value of accrued derivative liability


0



0.0
%


615,209



252.4
%Other income (expense)


(1,354
)


(0.6)
%


3,431



1.4
%Income tax


30



0.0
%


0



0.0
%Net income (loss)

$
(427,810)



(187.9
)%

$
770



0.3
%




Revenues.Revenues for the three months ended May 31, 2011 were $227,708, a decrease of $16,077, or approximately 6.6%, from revenues of $243,785 for the three months ended May 31, 2010.   The decrease in revenue for the quarter ending May 31, 2011 resulted in an increase in sales from LED products and a reduction in sales of LED lighting solutions.  LED product sales produce lower gross margins than sales of LED lighting solutions. We initiated a lower pricing strategy as we hope to establish our LED products in the marketplace.  However, we cannot give any assurance that we will be able to sell our products at prices which will enable us to operate profitably.





Gross Profit/ Gross Margin.   For the three months ended May 31, 2011, our gross profit was $381,318, resulting in gross margins of 67.45%, as compared with a gross profit of $68,306, resulting in a gross margin of 28% for the comparable quarter of 2010. The increase in gross margins reflects the reversal of an inventory writedown of $335,681which was taken at February 28, 2011.





Selling, General and Administrative Expenses.Selling, general and administrative expenses increased from 685,398 in the quarter ended May 31, 2010 to $806,937 in the quarter ended May 31, 2011, an increase of $121,539, or approximately 17.7%. This increase reflects higher expenses related to our business development and marketing efforts seeking to expand into the People’s Republic of China.





Operating Loss. In the three months ended May 31, 2011 operating loss was $425,619 as compared with an operating loss of $617,092 for the comparable quarter in 2010, a decrease in our loss of approximately $191,473 or 31.3%.  The decrease in the operating loss reflects the $335,681 reversal of the inventory writedown.


17


Gain on Change in Value of Accrued Derivative Liabilities.   During the year ended February 28, 2010, we issued shares of common stock pursuant to an agreement which required us to issue additional shares of common stock if we sold shares at a price which was less than $0.70 per share and warrants which had anti-dilution provisions which could have resulted in the Company being required to settle its common stock obligations by issuing more than the number of authorized and unissued shares of common stock. As a result of such provisions, we incurred derivative liabilities. During the quarter ended March 31, 2010, we recognized a gain of approximately $615,000 reflecting the change in fair value of the accrued derivative liability.  The change reflects a difference in the valuation of the derivative liability during the period, using the Monte Carlo simulation model, takes into effect a number of factors, including changes in the market price of the common stock. We had no derivative liabilities at either February 28, 2011 or May 31, 2011.





Other Income (Expense).  Other income, consisting of interest expense, gain (loss) on exchange and other income (expense) was not material for the three month periods ended May 31, 2011 or 2010.





Net Loss.  As a result of the foregoing, our net loss for the three months ended May 31, 2011 was $427,780or $(0.01) per share (basic and diluted), as compared with a restated net income of $770 or $0.00 per share (basic and diluted) for the three month period ended May 31, 2010.




Liquidity and Capital Resources:




The following table sets forth information as to the principal changes in the components of working capital from February 28, 2011 to May 31, 2011:





Category

May 31, 2011


February 28, 2011


Change (in $)


% ChangeCurrent assets:Cash and cash equivalents

$
33,392


$
35,652


$
(2,260
)


(6.3
)%Notes receivable, net


60,836



66,708



(5,872
)


(8.8
)%Accounts receivable, net


112,067



119,008



(6,941
)


(5.8
)%Other receivables


81,281



84,753



(3,472
)


(4.1
)%Inventories


334,079



-



334,079



100.0
%Prepayments


154,052



340,631



(186,579
)


(54.8
)%Other current assets


56,008



42,217



13,791



32.7
%Current liabilities:Short-term borrowings from banks


242,312



232,969



9,343



4.0
%Notes payable


12,927



151



12,776



8460.9
%Accounts payable


197,637



289,517



(91,880
)


(31.7
)%Other payables


474,268



471,620



2,648



0.6
%Accrued liabilities


608,628



445,612



163,016



36.6
%Due to related parties


2,782,521



2,355,473



427,048



18.1
%Other current liabilities


53,937



259,006



(205,069
)


(79.2
)%Working capital:Total current assets


831,715



688,969



142,746



20.7
%Total current liabilities


4,372,230



4,054,348



317,882



7.8
%Working capital


(3,540,515)



(3,365,380
)


(175,135
)


5.2
%





Our working capital deficiency decreased nominally from a deficiency of $3,365,380 at February 28, 2011 to a deficiency of $3,540,515 at May 31, 2011.


During the three months ended May 31, 2011, we financed our operations principally through the loans from company officers and directors.





During the three months ended May 31, 2011, we used $389,252 in our operations, principally reflecting our loss of $427,810, the issuance of equity for compensation of $290,667, the reversal of an inventory writedown of $335,681, a decrease in accrued liabilities of $159,625 and an increase in accounts payable of $92,228.   Cash flow used in investing activities was not significant, consisting of prepayments and purchase of property and equipment.  Cash flow from financing activities was $415,581, consisting primarily of proceeds of loans from related parties.





During the three months ended May 31, 2010, we used $629,096 in our operations, principally reflecting our nominal net income of $770 and the gain on change in fair value of derivative liabilities of $615,219.  Cash flow used in investing activities of $170,692 reflected primarily purchase of property and equipment of $129,105. Cash provided by financing activities of $682,346 reflected primarily the proceeds from the sale of common stock of $805,725 and payment of loans to related parties of $146,694.


18


As of May 31, 2011, we owed a total of approximately $ 2.78 million to related parties – our chief executive officer and one of our directors and the president of one of our subsidiaries.  The borrowings do not bear interest and are payable on demand.





We believe that we require significant financing for our operations, but based on our low gross margin, losses from operations, working capital deficiency and negative stockholders’ equity, combined with our low stock price and the absence of an active trading market in our stock, we may difficulty raising additional funds through the sale of our equity or debt securities.  The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.





ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not required for smaller reporting companies.





ITEM 4.  CONTROLS AND PROCEDURES.





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





Evaluation of Disclosure Controls and Procedures





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





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





Management’s Report of Internal Control over Financial Reporting.





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





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





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


19





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





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





Our material weaknesses related to:





·
An insufficient complement of personnel in our corporate accounting and financial reporting function with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complex financial accounting and reporting requirements and materiality thresholds.





·
Lack of familiarity with the accounting treatment of the issuance of equity in consideration of services rendered and with the accounting aspects of reverse acquisition accounting and the treatment of derivative securities.





·
Lack of documentation relating to sales or other dispositions of inventory.





·
Lack of internal audit function - the monitoring function of internal control is not well performed due to insufficient resources. In addition, the scope and effectiveness of internal audit function have yet to be developed.





·
Lack of written policies and procedures relating to periodic review of current policies and procedures and their implementation.





·
The absence of an audit committee comprised of independent directors.





We also intend to elect additional directors, who will be independent and one of whom could serve as the audit committee financial expert. We believe that the appointment of such directors will strongly influence our management in establishing the necessary controls.





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





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





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





Remediation and Changes in Internal Control over Financial Reporting





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


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





Limitations on Controls





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





PART II - OTHER INFORMATION





ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





On July 1, 2011, we issued 2,000,000 shares of common stock to Hui-Yun Lo, a director, in exchange for the cancellation of a non-interest bearing note due from us in the principal amount of $200,000.  The issuance of these shares was exempt from registration under Regulation S of the Securities and Exchange Commission under the Securities Act of 1933 (the “Securities Act”).  Ms. Lo is not a “U.S. person” as that term is defined in Rule 902(k) of Regulation S under the Securities Act.  Ms. Lo acquired the common stock for investment purposes for her own account and not as a nominee or agent, and not with a view to the resale or distribution thereof, and understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.





ITEM 6. EXHIBITS





Exhibit
Description of the Exhibit





31.1
Rule 13a-14(a)/15d-14(a) certification by the chief executive and chief financial officer.


32.1
Section 1350 certification by the chief executive officer and chief financial officer.




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





XODTEC LED, INC.Date:      July 19, 2011

/s/ Yao-Ting SuYao-Ting SuChief Executive Officer












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