UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q/A Amendment No. 2
  (Mark One)x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE QUARTERLY PERIOD ENDED November 30, 2010o
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)
 
 (Former name, former address and former fiscal year, if changed since last report)
 
 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. Yesx      Noo
 
 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).   Yeso       No x
 
 The number of shares of registrant’s common stock outstanding, as of January19, 2011 was 27,864,827.
 
 
 
 XODTEC LED, INC.
 Form 10-Q
 For the Quarter Ended November 30, 2010
 
 TABLE OF CONTENTS
 
 Page

No.PART I. - FINANCIAL INFORMATIONItem 1.
Financial StatementsConsolidated Balance Sheets as of November 30, 2010 ( unaudited and restated) and February 28, 2010 (audited and restated)
2Consolidated Statements of Operations and Comprehensive Income for the Nine Months Ended November 30, 2010 (unaudited and restated) and 2009 (unaudited and restated) and the Three Months Ended November 30, 2010 (unaudited and restated) and 2009 (unaudited and restated )
3Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 2010 (unaudited and restated) and 2009 (unaudited and restated )
4Notes to Unaudited Consolidated Financial Statements.
5Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
22Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
27Item 4.
Controls and Procedures.
27PART II - OTHER INFORMATIONItem 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
29Item 6.
Exhibits.
30
  EXPLANATORY NOTE
 
 This quarterly report on Form 10-Q/A is being filed as an amendment to our quarterly report on Form 10-Q for the quarter ended November 30, 2010, which was filed with the Securities and Exchange Commission on January 19, 2011 and amended by a filing on Form 10-K/A on February 1, 2011 .  This amendment reflects changes in the financial statements and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” only to the extent that they relate to the treatment as derivative securities and warrants that had not previously been treated as derivative securities .  No information in the Form 10-Q as initially filed and as amended has been updated.  Currently dated Exhibits 31.1 and 32.1, signed by the principal executive and financial officer, is included in this filing.
 FORWARD LOOKING STATEMENTS
 
 This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
 
 Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our report on Form 10-K for the year ended February 28, 2010, 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.
 
 1
 
  PART 1 - FINANCIAL INFORMATION
  XODTEC LED, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(RESTATED)November 30,


February 282010


2010(Unaudited)ASSETSCurrent assetsCash and cash equivalents

$
227,525


$
255,884Notes receivable, net


77,681



21,088Accounts receivable, net


145,431



103,472Other receivables


47,358



30,387Inventories, net


-



146,626Prepayments


301,752



69,537Other current assets


36,289



20,761Total current assets


836,036



647,755Property and equipment, net


115,366



631,773Other assetsDeposits


70,306



65,965Deferred assets


471,206



495,234Other assets


566,642



-Total assets

$
2,059,556


$
1,840,727LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilitiesShort-term borrowings from banks

$
22,156


$
20,339Notes payable


374,403



157,109Accounts payable


140,329



70,000Other payable


466,078



556,163Accrued liabilities


341,393



145,951Due to related parties


1,909,967



1,775,314Other current liabilities


170,372



2,370Total current liabilities


3,424,698



2,727,246Long-term borrowings from banks


15,430



30,582Accrued derivative liabilities


29,259



1,810,249Total liabilities


3,469,387



4,568,077Commitments and contingenciesStockholders' deficitPreferred stock, par value $0.001 per share, 10,000,000 shares


-



-authorized and 0 shares issued and outstandingCommon stock (225,000,000 authorized shares, par value $0.001 per share;


26,865



22,43026,864,827 and 22,430,004 issued and outstanding at November 30, 2010and February 28, 2010, respectively)Subscription receivable


(130,000
)


(130,000
)Additional paid in capital


3,514,532



1,515,742Accumulated deficit


(4,565,649
)


(4,093,347
)Accumulated other comprehensive gain - translation adjustments


(255,579
)


(42,175
)Total stockholders' deficit


(1,409,831
)


(2,727,350
)Total liabilities and stockholders' deficit

$
2,059,556


$
1,840,727
  The accompanying notes are an integral part of the financial statements.
  2
   XODTEC LED, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS ANDOTHER COMPREHENSIVE INCOME(UNAUDITED AND RESTATED)Nine months ended November 30,


Three months ended November 30,2010


2009


2010


2009Revenue

$
823,865


$
739,849


$
335,427


$
250,035Cost of revenue


921,025



623,289



290,755



186,419Gross profit


(97,160
)


116,560



44,672



63,616Selling, general and administrative expenses


2,208,741



2,070,635



821,415



801,233Net operating loss


(2,305,901
)


(1,954,075
)


(776,743
)


(737,617
)Other income (expense)Interest income


221



187



48



74Interest expense


(5,505
)


(1,791
)


(4,135
)


(718
)Gain(loss) on exchange


(834
)


2,799



(628
)


3,261Indemnity income


70,021



-



661



-Gain (loss) on change  in fair value of accrued derivative l iabilities


1,780,991



(122,507
)


534,568



(122,507
)Other income (expense)


(11,294
)


2,525



(14,698
)


2,008Total other income (loss)


1,833,600



(118,787
)


515,816



(117,882
)Net loss before income taxes


(472,301
)


(2,072,862
)


(260,927
)


(855,499
)Income taxes


-



-



-



-Net loss

$
(472,301
)

$
(2,072,862
)

$
(260,927
)

$
(855,499
)Translation adjustments


(213,404
)


(98,190
)


(202,516
)


(32,202
)Comprehensive (loss)

$
(685,705
)

$
(2,171,052
)

$
(463,443
)

$
(887,701
)Net loss per share- Basic

$
(0.02
)

$
(0.11
)

$
(0.01
)

$
(0.04
)- Diluted

$
(0.02
)

$
(0.11
)

$
(0.01
)

$
(0.04
)Weighted average common shares outstanding- Basic


24,194,073



18,609,458



25,948,893



20,903,081- Diluted


24,194,073



18,609,458



25,948,893



20,903,081
 
 The accompanying notes are an integral part of the financial statements.
 3
  XODTEC LED, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED AND RESTATED)Nine months ended November 30,2010


2009Cash Flows from operating activities:Net loss

$
(472,301
)

$
(2,072,862
)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization


85,053



23,714Issuance of common shares or warrants for professional services


281,750



1,107,867Allowance for doubtful accounts


31,144



-Loss on disposal of property and equipment


-



1,236Loss (gain) on change in fair value of accrued derivative liabilities


(1,780,991
)


122,507(Increase) Decrease in assets:Notes receivable


(53,612
)


(5,370
)Accounts receivable


(66,575
)


(58,677
)Other receivables


(14,894
)


8,841Inventories


148,796



98,679Prepayments


(2,261
)


11,214Other current assets


(13,975
)


(11,219
)Deposits


(949
)


(20,334
)Decrease (Increase) in liabilities:Notes payable


202,105



83,681Accounts payable


64,472



(158,981
)Other payable


(2,418
)


3,424Accrued liabilities


181,554



16,498Other current liabilities


41,192



(16,939
)Net cash used in operating activities


(1,371,910
)


(866,721
)Cash Flows from Investing activities:Increase in deferred assets


(14,643
)


(20,988
)Purchase of property and equipment


(196,513
)


(887
)Net cash used in investing activities


(211,156
)


(21,875
)Cash flows from financing activities:Proceeds from (Repayment of) borrowings from banks


(15,379
)


31,738Proceeds from related parties


42,757



36,378Proceeds from issuance of shares


1,515,725



884,110Net cash provided by financing activities


1,543,103



952,226Effect of exchange rate changes on cash and cash equivalents


11,604



6,422Net increase (decrease) in cash and cash equivalents


(28,359
)


70,052Cash and cash equivalents, beginning of the period


255,884



62,048Cash and cash equivalents, end of the period

$
227,525


$
132,100Supplemental disclosures of cash flow information:Interest paid

$
5,505


$
1,791Income taxes paid

$
-


$
-Non-cash investing and financing activities:Issuance of equity as prepayment of professional fees

$
435,000


$
1,039,000
 The accompanying notes are an integral part of the financial statements.
  4
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 
 NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
 Xodtec LED, Inc.  (“Company”) is a Nevada corporation incorporated on November 29, 2006, under the name Sparking Events, Inc.  On June 28, 2009, the Company’s corporate name was changed to “Xodtec Group USA, Inc.” and on May17, 2010 the Company’s corporate name was changed to “Xodtec LED, Inc.”
 
 The Company, through its subsidiaries, is engaged in the design, marketing and selling of advanced lighting solutions which are designed to use less energy and have a longer life than traditional incandescent, halogen, fluorescent light sources.  The Company’s wholly-owned subsidiaries, Xodtec Technology Co., Ltd. (“Xodtec”); Targetek Technology Co., Ltd. (“Targetek”); UP Technology Co., Ltd. (“UP”), are organized under the laws of the Republic of China (Taiwan).  The Company also owns a 35% interest in Radiant Sun Development S.A., a company organized under the laws of the Independent State of Samoa (“Radiant Sun”).
 
 On April 1, 2009, in anticipation of the exchange agreement described in the following paragraph, APlus International, Ltd., a Nevada limited liability company (“APlus”), acquired all of the capital stock of Xodtec, Targetek and UP, pursuant to agreements with the shareholders of each of these companies (The application of domestic investment by foreign nationals governed by the Investment Commission of the Republic of China is still in the process ) and acquired a 35% interest in Radiant Sun pursuant to an agreement with the holders of 35% of the capital stock of Radiant Sun.  As a result of these agreements, the former shareholders of Xodtec, Targetek and UP and the former holders of 35% of the stock of Radiant Sun 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 significant operations prior to the reverse acquisition.
 
 Under generally accepted accounting principles, the acquisition by the Company of Xodtec, Targetek and UP is equivalent to the acquisition by APlus of the Company, then known as Sparking Events, Inc., with the issuance of stock by APlus for the net monetary assets of the Company.  This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure.  Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse acquisition accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, APlus.   Since APlus was organized to acquire Xodtek, Targetek and UP on April 1, 2009, and had no operations, the Company’s historical financial statements reflect the operations of Xodtek, Targetek and UP prior to April 1, 2009, the combined operations of APlus, Xodtek, Targetek and UP from April 1, 2009 to April 20, 2009, and the combined operations of these companies and the Company from April 20, 2009.  The accompanying financial statements reflect the recapitalization of the shareholders’ equity as if the transactions occurred as of the beginning of the first period presented.  Thus, only the 16,000,002 shares of common stock issued to the former APlus members are deemed to be outstanding for all periods reported prior to the date of the reverse acquisition.   The 1,380,000 shares of common stock that were outstanding on April 20, 2009, after giving effect to the cancellation of the 27,000,000 shares that were acquired by the Company and cancelled, are treated as if they were issued on April 20, 2009, as part of a recapitalization.
 
 5
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 
 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.
 
 Stock Distribution
 
 On April 30, 2009, the Company’s Articles of Incorporation were amended to increase the number of authorized shares of common stock from 75,000,000 to 225,000,000 and to effect a 3-for-1 stock split.  The par value of $0.001 per share was not changed as a result of the stock split.  All share and per share references in these financial statements retroactively reflect this stock split.
 
 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 consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles for interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended February 28, 2010. Operating results for the nine-month period ended November 30, 2010 are not necessarily indicative of the results that may be expected for the year ended February 28, 2011.
 
 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.
 
 6
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 
 Segment Information
 
 ASC 280 requires companies to report information about operating segment in interim and annual financial statements. It also requires segment disclosures about products and services geographic and major customers. The Company has determined that it does not have any separately reportable operating segments.
 
 Revenue Recognition
 
 The Company’s revenue recognition policies are in compliance with ASC 605 (Originally issued as Staff Accounting Bulletin (SAB) 104). Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.   Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Sales taxes are not recorded as a component of sales.
 
 Cost of Sales
 
 The cost of sales 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.
 
 Shipping and Handling Costs
 
 The Company records all charges for outbound shipping and handling as revenue. All compounding shipping and handling costs are classified as cost of goods sold.
 
 Accounts Receivable
 
 Accounts receivable are carried at original invoice amount less the allowance for doubtful accounts based on a review of all outstanding amounts at year end. Management determines the allowance for doubtful accounts by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Allowance for doubtful accounts amounted to $31,144 and $0 at November 30, 2010 and February28, 2010, 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$384,000 and $23,000 of inventory valuation reserve for LCM inventory adjustments for the nine months ended November 30, 2010 and 2009, respectively.
 
 7
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 
 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
5 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.
 
 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 (loss) on change in fair value of accrued derivative liabilities .” During the quarter ended November 30, 2010, the Company determined that there were derivatives in accrued derivative liabilities. The changes in the value of these derivatives are shown in the accompanying statement of operations as “gain (loss) on change in fair value of accrued derivative liabilities .”
 Subscription Receivable
 
 The subscription receivable reflects the sales of common stock in July 2009 for which the Company had not received payment as of February 28, 2010 or November 30, 2010.
 
 
 8
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 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 nine months ended November 30, 2010.  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 and nine months ended November 30, 2010 and 2009, 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
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 
 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 nine monthsNovember 30,

2010


2009Taiwan dollar (NTD)

NTD 30.53270


NTD 33.00431United States dollar ($)

$
1.00000


$
1.00000Exchange Rate atNovember 30,


2010



2009Taiwan dollar (NTD)

NTD 31.61906


NTD 32.34200United States dollar ($)

$
1.0000


$
1.0000
 
 
 Comprehensive Income (Loss)
 
 Comprehensive income (loss)  includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income (loss) on its statements of stockholders’ equity.
 
 Share Based Expenses
 
 ASC 718 requires a public entity to expense the cost of employee and non-employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements.  The Company expenses share-based costs in the period incurred.
 
 NOTE 3 - 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 nine months ended November 30, 2010, the Company incurred a net loss of approximately $472,000 and an operating loss of approximately $2.3 million.  Although the Company’s net loss for the nine months ended November 31, 2010 was approximately $472,000, the amount of the net loss was substantially reduced by a gain on change in fair value of accrued derivative liabilities in the amount of approximately $1.8 million.   In addition, the Company had a negative cash flow in operating activities amounting approximately $1,372,000 in the nine months ended November 30, 2010, and the Company’s accumulated deficit was approximately $4,600,000 as of November 30, 2010. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company may seek additional funding through additional issuance of common stock and/or borrowings from financial institutions and defer the amounts due under the credit line. Management believes that actions presently being taken to obtain additional funding could provide the opportunity for the Company to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
 
 
 10
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 NOTE 4 - 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.
 
 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 - REVERSE ACQUISITION.
 
 On April 20, 2009, the Company acquired APlus pursuant to the reverse acquisition.  Pursuant to the exchange agreement between the Company, APlus and the members of APlus, the Company issued 16,000,002 shares of common stock in exchange for all of the stock of Xodtec, Targetek and UP and APlus’ 35% interest in Radiant Sun.
 
 Simultaneously with the reverse acquisition, the Company’s then principal stockholder transferred to the Company 27,000,000 shares of common stock for no consideration.  These shares were cancelled.  As a result of the reverse acquisition and the cancellation of the 27,000,000 shares from the then principal shareholder, the former members of APlus beneficially owned approximately 92% of the outstanding shares of our common stock upon completion of the reverse acquisition.
 
 In connection with the reverse acquisition, the Company entered into the following agreements.
 
 On April 20, 2009, the Company issued 350,001 shares of common stock at $0.30 per share and total value of $105,000, and two-year warrants to purchase 250,000 shares of common stock at an exercise price of $1.00 per share, for services rendered by Dragonfly Capital Partners, LLC (“Dragonfly”) in connection with the Exchange.  The Company has agreed to register the common stock issued to Dragonfly and the shares of common stock issuable upon exercise of Dragonfly’s warrants. Using the Black-Scholes valuation model, the value of these warrants is $34,191. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions:  discount rate – 0.735%; dividend yield – 0%; expected volatility – 72% and term of 1.5 years. These warrants were reclassified out of equity and recorded as a derivative liability beginning September 29, 2009. (See Note 6).
 On April 22, 2009 the Company entered into a financial advisory agreement with Unise Investment Corp. (“Unise”) to provide financial consulting services in consideration for 350,001 shares of common stock at $0.30 per share and total value of $105,000.
 
 On April 23, 2009, the Company issued warrants to purchase 1,500,000 shares of common stock to Unise, of which (i) warrants to purchase 200,000 shares of common stock at $0.65 per share were expired and unexercised on October 23, 2009, (ii) warrants to purchase 500,000 shares of common stock at $1.00 per share will be expired on April 23, 2011 and (iii) warrants to purchase 800,000 shares of common stock at $1.50 per share will be expired on April 23, 2011.  The Company agreed to register the shares of common stock underlying these warrants. Using the Black-Scholes valuation model, the value of these warrants is $154,676. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions:  discount rate – 0.34% ~0.75%; dividend yield – 0%; expected volatility – 72% and term of 6 months, 0.5 years and 0.5 years. These warrants were reclassified out of equity and recorded as a derivative liability beginning September 29, 2009. (See Note 6).
 11
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 The Company issued the shares and warrants issued Dragonfly and Unise, as described in the preceding paragraphs, for consulting service. The value of the shares and warrants were included in general and administrative expenses for the nine months ended November 30, 2009.
 
 NOTE 6 – CAPITAL STOCK AND SHARE-BASED PAYMENTS
 
 On July 8, 2009, the Company issued and sold 1,000,000 shares of common stock to certain investors for a cash price of $0.65 per share and a total amount of $650,000.  As of November 30, 2009, the Company had received $884,110, and the balance of $360,750 had not been received and is treated as a subscription receivable.
 
 On September 29, 2009, the Company sold to an investor for $700,000 (i) 1,000,000 shares of common stock and (ii) warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.50 per share. Pursuant to the common stock subscription agreement, the Company agreed that:
 
 ·
for 18 months after the closing, it would not issue any class or debt or equity which could be convertible into common stock.
 
 ·
If the Company issues common stock to any investor at a price of less the $0.70 per share, then the Company would issue to the investor such number of additional shares which equals to the amount of the investor’s purchase ($700,000) divided by the difference between $0.70 per share and the purchase price paid in the subsequent offering.
 
 The Company has treated the potential additional share issuance under the common stock subscription agreement as a derivative under ASC Topic 815, Subtopic 40 since the number of shares the Company may issue to settle the anti-dilution provisions of the stock subscription agreement is not fixed.  Derivative instruments are recorded at fair value and marked-to-market each period until it is exercised or expire, with any change in the fair value charged or credited to income each period. The fair value was estimated by Monte Carlo simulation model. The fair value of the accrued derivative liability related to the anti-dilution provisions was based on the following assumptions:
 
 November 30, 2010


September 29, 2009Trigger price

$0.70


$0.70Standard deviation


479.60%



74.10%Annual risk-free rate


0.17%



0.68%Time to expiration


0.33



1.50Period risk-free rate


0.001%



0.003%
 
 The fair value of the anti-dilution derivative was $20.870 and, $1,240,488 at November 30, 2010 and February 28, 2010, respectively.
 
 The warrants are exercisable until September 25, 2012.  The holder of the warrants has cashless exercise rights, commencing September 29, 2010, except that the warrant may not be exercised on a cashless basis if the underlying shares of common stock are subject to a current and effective registration statement. The Company has the right to require the holder to exercise the warrant on 35 trading days’ notice if the volume weighted average price of one share of common stock is at least $2.50 and the trading volume is at least 50,000 shares, in each case for 25 consecutive trading days ending before the Company gives notice of its demand in exercising the warrant. The warrant also prohibits exercise to the extent that such exercise would result in the holder and the affiliates of the holder beneficially owning more than 4.9% of the Company’s common stock, with beneficial ownership being determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended.  The Company has treated the warrants as derivatives under ASC Topic 815, Subtopic 40 since the number of shares the Company may issue to settle the anti-dilution provisions of the stock subscription agreement is not fixed and it is possible that there may not be a sufficient number of authorized and unissued shares to settle the Company’s common stock obligations in common stock at the date of exercise. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions:
 
 November 30, 2010


September 29, 2009Expected volatility

264%



72%Expected term (years)


0.3 – 1.3



1.4 – 2.5Discount rate


0.18% - 0.32%



0.65% - 1.24%Dividend yield


0%



0%








12





The fair value of the warrants was $8,389 and $569,762 at November 30, 2010 and February 28, 2010, respectively.  See Note 19 with respect to the cancellation of warrants in December 2010,





In accordance with ASC 815-40-35-8, the Company considered the effect of the common stock anti-dilution provision on the existing outstanding warrants that were issued prior to September 29, 2009. Because in the future there may not be a sufficient number of authorized and unissued shares to settle the Company’s common stock obligations in common stock, the Company has reclassified the fair value of the warrants from equity to liabilities at September 29, 2009.  The Company recorded gain on change in fair value of accrued derivative liabilities of $1,780,991 and $534,568 for the nine and three months ended November 30, 2010 related to the anti-dilution provision derivative and warrants.  The value of the warrants was determined by using the Black-Scholes pricing model with the above assumptions.




The Company issued securities during the nine months ended November 30, 2010 as follows:




On February 23, 2010, the Company issued 100,000 restricted shares of its common stock at $0.45 per share and total value of $45,000, to Prostep International Corp. for the services provided in connection with a trade show in March 2010.





On June 29, 2010, the Company entered into contracts with two consultants pursuant to which consultants are to provide services in connection with the Company’s expansion into China for a one year period. Pursuant to the contracts, the Company issued 600,000 shares of common stock to the consultants. The value of the shares, $192,000, is based on the closing price of the common stock at $0.32 on June 29, 2010, and is being amortized over the one-year term of the contracts commencing on July 1, 2010.





On September 1, 2010, the Company entered into contracts with one consultant pursuant to which consultants are to provide services in connection with the Company’s expansion into China for a one year period. Pursuant to the contracts, the Company issued 350,000 shares of common stock to the consultants. The value of the shares, $63,000, is based on the closing price of the common stock at $0.18 on September 1, 2010, and is being amortized over the one-year term of the contracts commencing on September 1, 2010.





On September 10, 2010, the Company entered into contracts with one consultant pursuant to which consultants are to provide services in connection with the Company’s expansion into China for a one year period. Pursuant to the contracts, the Company issued 350,000 shares of common stock to the consultants. The value of the shares, $52,500, is based on the closing price of the common stock at $0.15 on September 10, 2010, and is being amortized over the one-year term of the contracts commencing on September 1, 2010.





On October 1, 2010, the Company entered into contracts with one consultant pursuant to which consultants are to provide services in connection with the Company’s expansion into China for a one year period. Pursuant to the contracts, the Company issued 500,000 shares of common stock to the consultants. The value of the shares, $90,000, is based on the closing price of the common stock at $0.18 on October 1, 2010, and is being amortized over the one-year term of the contracts commencing on October 1, 2010.





On November 25, 2010, the Company extended the contract with one consultant pursuant to which consultants are to provide services in connection with the Company’s expansion into China for another one year period.  Pursuant to the contracts, the Company issued 500,000 shares of common stock to the consultants. The value of the shares, $90,000, is based on the closing price of the common stock at $0.20 on November 25, 2010, and is being amortized over the one-year term of the contracts commencing on July 1, 2011.





13





XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010





During the nine months ended November 30, 2010, the Company sold 2,134,823 shares of common stock to investors for a cash price of $0.71 per share and a total amount of $1,515,724.





Warrant activity for the nine months ended November 30, 2010, is summarized as follows:





Shares subject to Warrants


Weighted Average Exercise PriceBalance at February 28, 2010

2,550,000


$
1.35Granted


-Exercised


-Balance at November 30, 2010


2,550,000


$
1.35





The following table summarizes the shares of common stock issuable upon exercise of warrants outstanding at November 30, 2010:





Exercise Price


Outstanding at November 30, 2010


Weighted Average Remaining Contractual Life (Years)


Number Exercisable at November 30, 2010$
1.00



750,000



0.45



750,000$
1.50



1,800,000



1.19



1,800,000





NOTE 7 – INVENTORIES





As of November 30, 2010 and February 28, 2010, the Company’s inventory consisted of raw material, work in progress and finished goods as follows:





November 30,

2010


February 28,

2010Raw Material

$
161,947


$
76,044Work-in-process


22,308



11,269Finished goods


213,793



59,313Gross inventory

$
398,048


$
146,626Less amount to reduce inventories to lower of cost or market


(398,048)



-Net inventory

$
-


$
146,626








NOTE 8 – PROPERTY AND EQUIPMENT





14





XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010





Property and equipment consisted of the following:





November 30,

2010


February 28,

2010Office equipment

$
106,281


$
66,365Machinery


51,073



-Equipments for leases


-



755,681Other equipment


-



4,016Total property and equipment


157,354



826,062Accumulated depreciation


(41,988
)


(38,555
)Accumulated impairment


-



(155,734
)Total property and equipment, net

$
115,366


$
631,773





Depreciation and amortization expenses during the nine months ended November 30, 2010 and 2009 were $85,053 and $23,714, respectively.





NOTE 9 – DEFERRED ASSETS





Deferred assets consisted of the following:





November 30,

2010


February 28,

2010Long-term prepaid professional fee

$
428,625


$
451,500Other long-term prepaid expenses


42,581



43,734Total deferred assets

$
471,206


$
495,234





NOTE 10 – OTHER ASSETS





Other assets are reported at the lower of the carrying amount or fair values less cost to sell. As of November 30, 2010, the net realizable value of this idle asset was $566,642. This equipment has been used for Energy saving contract, which has been terminated, and this equipment will not have other usage. Therefore, the balance of this idle equipment has been classified from fixed assets into other assets. The Company still has other payable regarding this equipment as of November 30 and February 28, 2010 were $459,830 and $437,954, respectively.





NOTE 11 – SHORT-TERM BORROWINGS





Short-term borrowings consisted of the following at November 30, 2010 and February 28, 2010:





November 30,

2010


February 28,

2010From First Bank, interest at 4.94%, maturity date 7/1/2012

$
37,586


$
50,921Total


37,586



50,921Current portion

$
22,156


$
20,339Long-term portion

$
15,430


$
30,582





15





XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010


NOTE 12 – ACCRUED DERIVATIVE LIABILITIES
 
 On September 29, 2009, the Company sold to an investor for $700,000 (i) 1,000,000 shares of common stock and (ii) warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.50 per share. Under certain circumstances, the stock subscription agreement could cause the Company to issue more than the number of authorized and unissued shares to settle its common stock obligations is shares of common stock. The Company applies ASC 815, under which the warrants as well as other equity related instruments have been recorded as accrued derivative liabilities on the Company’s balance sheet. The Company has reclassified $582,245 related to previously issued warrants into accrued derivative liabilities at September 29, 2009. At November 30, 2010 and February 28, 2010, the Company has accrued derivative liabilities of $29,259 and $1,810,249, respectively.


NOTE 13 – 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 14 – RELATED PARTY TRANSACTIONS





-
Due to related parties





As of November 30, 2010 and February 28, 2010, the Company had outstanding borrowings from





-
its CEO in the aggregate amounts of $564,667 and $337,155, respectively,-
one of its directors in the aggregate amounts of $1,147,282 and $1,332,187, respectively,-
the president of its subsidiary, UP, in the aggregate amounts of $164,53 and $105,972, respectively, and-
one shareholders in the aggregate amounts of $33,485 and $0, respectively.





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





As of November 30, 2010 and February 28, 2010, the Company had accounts payable amounted of $0 and $26,075, respectively, to Chunghwa.





NOTE 15 - 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 nine months ended November 30, 2010 and 2009, respectively, and the accounts receivable from such customers:





Revenue

Nine Months Ended November 30,


Percentage of Total Revenue


Accounts Receivable

At November 30,2010-Customer A

$
79,594



10
%

$
24,1552009-Customer B

$
123,334



17
%

$
-





16





XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 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 nine months ended November 30, 2010 and 2009, respectively, and the accounts payable to such suppliers:





Purchase

Nine months Ended November 30,


Accounts /Notes Payable

At November 30,2010-Vendor A

$
190,390


$
--Vendor B


56,843



36,5312009





There is no major supplier who accounted over 10% or more of the Company’s purchases for the nine months ended November 30, 2009.





17





XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010





NOTE 16 - COMMITIMENTS AND CONTINGENCIES





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





Twelve months ending

AmountsNovember 30, 2011

$
123,369November 30, 2012

$
28,990





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 revenue and results of operations for nine months periods ended November 30, 2009 reflect a significant negative change from the information provided for the quarters in that year.  The Company cannot determine whether it will incur any liability as a result of such restatement.








NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)





Balances of related after-tax components comprising accumulated other comprehensive loss, included in stockholders’ equity and at November 30, 2010 and February 28, 2010 are as follows:





Foreign Currency Translation AdjustmentBalance at February 28, 2010

$
(42,175)Change for three month periods ended


(213,404)Balance at November 30, 2010

$
(255,579)





NOTE 18 – RESTATEMENT OF FINANCIAL STATEMENTS
 
 (1)Restatement of Prior Financial Statements
 
 The Company’s financial statements for the three and nine months ended November 30, 2009 have been restated to reflect corrections in the statements previously provided. In connection with the audit of the Company’s financial statement for the fiscal year ended February 28, 2010, the Company determined that it did not have sufficient documentation to confirm previously reported revenue, cost of revenue, selling, general and administrative expenses, and weighted average common shares outstanding. The Company also re-valued the fair value of the accrued derivative liability based on ASC 815 “Derivatives and Hedging”. As a result, the consolidated statements of operations and other comprehensive income and statements of cash flows were restated. The following table sets forth the consolidated statement of operations and other comprehensive income and statements of cash flows of the Company for the three and nine month periods ended November 30, 2009 as initially presented as restated:
 
 Nine Months Ended November 30, 2009As Originally





Effect ofReported


As Restated


ChangeRevenue

$
11,545,510


$
739,849


$
(10,805,661
)Cost of revenue


8,387,986



623,289



(7,764,697
)Gross profit


3,157,524



116,560



(3,040,964
)Selling, general and administrative expenses


2,593,975



2,070,635



(523,340
)Net operating income (loss)


563,549



(1,954,075
)


(2,517,624
)Other income


2,994



(118,787
)


(121,781
)Net income (loss) before income taxes


566,543



(2,072,862
)


(2,639,405
)Income taxes expense (benefit)


(185,972
)


-



185,972Net income (loss)

$
752,515


$
(2,072,862
)

$
(2,825,377
)Translation adjustments


451,297



(98,190
)


(549,487
)Comprehensive income (loss)

$
1,203,812


$
(2,171,052
)

$
(3,374,864
)Net income (loss) per share- Basic

$
0.04


$
(0.11
)- Diluted

$
0.04


$
(0.11
)Weighted average common shares outstanding- Basic


18,609,458



18,609,458- Diluted


18,763,438



18,609,458
  
 18
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 Three Months Ended November, 2009As Originally





Effect ofReported


As Restated


ChangeRevenue

$
7,370,924


$
250,035


$
(7,120,889
)Cost of revenue


6,449,619



186,419



(6,263,200
)Gross profit


921,305



63,616



(857,689
)Selling, general and administrative expenses


1,188,251



801,233



(387,018
)Net operating loss


(266,946
)


(737,617
)


(470,671
)Other income (loss)


13,124



(117,882
)


(131,006
)Net loss before income taxes


(253,822
)


(855,499
)


(601,677
)Income taxes expense (benefit)


(330,124
)


-



330,124Net income (loss)

$
76,302


$
(855,499
)

$
(931,801
)Translation adjustments


442,180



(32,202)



(474,382
)Comprehensive income(loss)

$
518,482


$
(887,701
)

$
(1,406,183
)Net income (loss) per share- Basic

$
0.00


$
(0.04
)- diluted

$
0.00


$
(0.04
)Weighted average common shares outstanding- Basic


20,903,081



20,903,081- diluted


21,101,055



20,903,081


As Originally





Effect ofReported


As Restated


ChangeCash Flows from operating activities:Net income (loss)

$
752,515


$
(2,072,862
)

$
(2,825,377)Adjustments to reconcile net income (loss)  to net cash used in operating activities:Depreciation and amortization


28,703



23,714



(4,989)Issuance of common shares or warrants for professional services


1,107,867



1,107,867



-Loss on disposal of property and equipment


-



1,236



(1,236
)
 
 19
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 
 
 Loss  on change in fair value of accrued derivative liability

-


122,507


122,507(Increase) Decrease in assets:Notes receivable


-



(5,370
)


(5,370)Accounts receivable


(2,500,950
)


(58,677
)


2,442,273Other receivables


(62,775
)


8,841



71,616Inventories


(26,359
)


98,679



125,038Prepayments


(365,744
)


11,214



376,958Other current assets


(21,127
)


(11,219
)


9,908Deposits


-



(20,334
)


(20,334)Decrease (Increase) in liabilities:Notes payable


-



83,681



83,681Accounts payable


730,994



(158,981
)


(889,975
)Other payable


1,243



3,424



2,181Accrued liabilities


274,021



16,498



(257,523
)Other current liabilities


(10,705
)


(16,939
)


(6,234
)Increase in income tax payable


(185,969
)


-



185,969Net cash used in operating activities


(278,286
)


(866,721
)


(588,435
)Cash flows from investing activities:Increase in long-term prepayments


-



(20,988
)


(20,988
)Purchase of property and equipment


-



(887
)


(887
)Proceeds from sale of assets


351



-



(351
)Net cash provided by (used in) investing activities


351



(21,875
)


(22,226
)Cash flows from financing activities:Proceeds from borrowings from banks


30,112



31,738



1,626Proceeds from (Repayment of) related parties


(614,205
)


36,378



650,583Proceeds from issuance of shares


884,110



884,110



-Net cash provided by financing activities


300,017



952,226



652,209Effect of exchange rate changes on cash and cash equivalents


(2,319
)


6,422



8,741Net increase in cash and cash equivalents


19,763



70,052



50,289Cash and cash equivalents, beginning of the year


107,340



62,048



(45,292
)Cash and cash equivalents, end of the period

$
127,103


$
132,100


$
4,997
 
 20
 
 XODTEC LED, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 November 30, 2010
 
 
 (2)Restatement of Current Financial Statements
 
 The Company’s financial statements for the three and nine months ended November 30, 2010 have been restated to reflect corrections in the statements previously provided. The Company re-valued the fair value of the accrued derivative liability based on ASC 815 “Derivatives and Hedging”. As a result, the consolidated statements of operations and other comprehensive income and statements of cash flows were restated.
 
 The following table sets forth consolidated balance sheets, consolidated statement of operations and other comprehensive income and statements of cash flows of the Company for the nine and three months ended November 30, 2010 as initially presented as restated:
 
 As Originally






Effect ofReported


As Restated


ChangeLIABILITIES AND STOCKHOLDERS' EQUITYAccrued derivative liabilities

$
-


$
29,259


$
29,259Total liabilities


3,440,128



3,469,387



29,259Stockholders' deficitAdditional paid-in capital


5,676,557



3,514,532



(2,162,025)Accumulated deficit


(6,698,415
)


(4,565,649
)


2,132,766Total stockholders' deficit


(1,380,572
)


(1,409,831
)


(29,259)
 
 Nine Months Ended November 30, 2010As Originally





Effect ofReported


As Restated


ChangeGain on change in fair value of accrued derivative liabilities

$
-


$
1,780,991


$
1,780,991Total other income


52,609



1,833,600



1,780,991Net loss before income taxes


(2,253,292)



(472,301)



1,780,,991Net loss

$
(2,253,292)


$
(472,301
)

$
1,780,991Comprehensive loss

$
(2,466,696)



(685,705
)

$
1,780,991Net loss per share- Basic

$
(0.09)


$
(0.02
)- Diluted

$
(0.09)


$
(0.02
)
 
 Three Months Ended November 30, 2010As Originally





Effect ofReported


As Restated


ChangeGain on change in fair value of accrued derivative liabilities

$
-


$
534,568


$
534,568Total other income


(18,752)



515,816



534,568Net loss before income taxes


(795,495)



(260,927)



534,568Net loss

$
(795,495)


$
(260,927
)

$
534,568Comprehensive loss

$
(998,011)



(463,443
)

$
534,568Net loss per share- Basic

$
(0.03)


$
(0.01
)- Diluted

$
(0.03)


$
(0.01
)
 
 As Originally





Effect ofReported


As Restated


ChangeCash Flows from operating activities:Net loss

$
(2,253,292)


$
(472,301
)

$
1,780,991Gain on change in fair value of accrued derivative liabilities


-



(1,780,991)



(1,780,991)


NOTE 19 - SUBSEQUENT EVENTS





In October 2009, the Company sold to an investor, for $700,000, (i) 1,000,000 shares of common stock and (ii) warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.50 per share. The agreement provided that, if the Company sold shares of common stock at a price which is less than $0.70 per share, the Company would issue to the investor additional shares such that the investor’s purchase price per share would equal the lower price.  On December 8, 2010, the Company and the investor entered into an agreement pursuant to which (a) the Company issued 1,000,000 shares to the investor, and (b) the investor cancelled the warrants and reduced from $0.70 to $0.25 the price per share of common stock that would trigger the issuance of additional shares to the investor.







21





ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS 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





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.; Targetek Technology Co., Ltd.; UP Technology Co., Ltd., 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”), which is presently inactive.





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.  We have recently commenced marketing our LED systems to major potential customers under a program in which our revenue is based on the savings the customer realizes from using our system rather than the customer’s existing system.  Through November 30, 2010, we have not generated any revenue from this type of sale, and we cannot assure you that we will be able to generate significant revenue from this program.





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 become commodities with the customer looking solely to price, we will need to distinguish ourselves by offering solutions of which 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 November 30, 2010, our gross margin was 13.32%, as compared with 25.44% for the three month periods ended November 30, 2009.  For the nine months ended November 30, 2010, we had a negative gross margin of 11.8% as compared with a gross margin of 15.8% for the comparable period of 2009.   The reduction in gross margin is due to an increase in product sales which carry lower margins and a decrease of sales in lighting solutions and our attempt to increase our revenue by selling at low prices.


We require significant cash for the development of our business.  In offering project-based solutions and in 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.





22





Effect of Absence of Financial Controls; Restatement of Financial Statements; Changes from Previously Reported Results





In the course of preparing our annual financial statements for the year ended February 28, 2010, we determined that we did not have sufficient accounting controls in place in order to enable us to verify key financial items, including revenue and cost of revenue. In this connection, we determined that we did not have sufficient documentation to confirm previously reported revenue, cost of revenue, selling, general and administrative expenses, and weighted average common shares outstanding.  Further, in connection with the financial statements for the year ended February 28, 2010, we re-valued the fair value of the accrued derivative liability at $1,240,488 at February 28, 2010, and recognized loss on change in fair value of accrued derivative liability of $968,595 for the year ended February 28, 2010. Consequently, the income recognition was reflected in the liability and stockholders’ deficit sections of our consolidated balance sheet. The income recognition was also reflected in the operating activities section of the consolidated statements of cash flows. The recognition had no effect on the amounts of net cash used in operating activities. As a result, we incurred a restated net loss of $3.6 million on revenue of $992,000 for the year ended February 28, 2010, as compared with net income of $753,000 on revenue of $11.5 million for the nine months ended November 30, 2009. We also restated our financial statements for the year ended February 28, 2009. These problems affected each quarter during 2009, and, as a result, our financial statements for the six and three months ended August 31, 2009 were restated. As originally reported, we showed net income of $724,000 on revenue of $1.2 million. As restated, we reported a net loss of $1.2 million on revenue of $490,000.
 
 For the nine months ended November 30, 2010, we originally reported a net loss of approximately $2.3 million on revenue of approximately $824,000. As restated, we reported a loss of approximately $472,000.  The difference reflects a gain of approximately $1.8 million from the change in the fair value of accrued derivative liability. For the three months ended November 30, 2010, we originally reported a net loss of approximately $795,000 on revenue of approximately $335,000. As restated, we reported a loss of approximately $261,000.   The difference reflects a gain of approximately $535,000 from the change in the fair value of accrued derivative liability. This reduction in our net loss results from the treatment as derivative liabilities relating to previously issued securities that have initially been accounted for as equity.  This change did not affect our revenue, net operating loss or our cash flow used in operations.  See Note 18 of Notes to Consolidated Financial Statements.


Although we are taking steps to implement financial controls, 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.





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.





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 $398,000 and $24,000 of inventory valuation reserve for LCM inventory adjustments for the nine months ended November 30, 2010 and 2009, respectively.








23
 
  Accrued Derivative Liabilities
 
 We apply 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. We determine which instruments require liability accounting, and record 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 (loss) on change in fair value of accrued derivative liability.” During the quarter ended November 30, 2010, we determined that there were derivatives in accrued derivative liabilities. The changes in the value of these derivatives are shown in the accompanying statement of operations as “gain (loss) on change in fair value of accrued derivative liabilities.”


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 yearsEquipments 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 November 30, 2010 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.




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 November 30, 2010 and 2009





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 November 30,2010


2009Dollars


%


Dollars


%Revenues

$
335,427



100.0
%

$
250,035



100.0
%Cost of sales


290,756



86.8
%


186,419



74. 6
%Gross profit


44, 671



13.3
%


63,616



25.4
%Selling, general and administrative expenses


821,414



244.9
%


801,234



320.4
%Operating income (loss)


(776,743
)


(231.6
)%


(737,618
)


(295.0
)%Interest expense, net


(4,087
)


(1.2
)%


(644
)


(0.3
)%Gain(Loss) on exchange


(628
)


(0.2
)%


3,261



1.3
%Indemnity income


661



0.2
%


0



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


534,568



159.4
%


(122,507
)


(49.0)
%Other income (expense)


(14,698
)


(4.38)
%


2,008



0.8
%Income tax


0



0.0
%


0



0.0
%Net (loss)

$
(260,927
)


(77.8
)%

$
(855,499
)


(342.2
)%




24




Revenues.Revenues for the three months ended November 30, 2010 were $335,427, an increase of $85,392, or approximately 34.15%, from revenues of $250,035 for the three months ended November 30, 2009.   The increase in revenue for the quarter ending November 30, 2010 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 November 30, 2010, our gross profit was $44,671, resulting in gross margins of 13.31%, as compared with a gross profit of $63,616, resulting in a gross margin of 25.44% for the comparable quarter of 2009. The decrease in gross margins reflects an increase in LED product sales, which generate a lower gross margin, and a reduction in sales of lighting solutions.





Selling, General and Administrative Expenses.Selling, general and administrative expenses increased from 801,234 in the quarter ended November 30, 2009 to $821,414 in the quarter ended November 30, 2010, an increase of approximately 2.52%. This increase reflects higher expenses related to our marketing effort seeking to expand into other geographic regions.





Operating Loss. In the three months ended November 30 2010, our loss from operations amounted to $776,743 as compared with a loss from operations of $737,618 for the comparable quarter in 2009, an increase in our loss of approximately $39,125 or 5.3%.


Gain (Loss) 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. As a result of such provision, we incurred a derivative liability. During the quarter ended November 30, 2010, we recognized a gain of $534,568 reflecting the change in fair value of the accrued derivative liabilities, as compared with a loss of $122,507 for the quarter ended November 30, 2009. The change reflects a difference in the valuation of the derivative liability during the period, using the Monte Carlo and Black-Scholes simulation models , take into effect a number of factors, including changes in the market price of the common stock.




Other Income (Expense). Other expense for the quarter ending November 30, 2010 was $14,698.  Other income was not significant for the three months ended November 30, 2009.





Net Loss. As a result of the foregoing, our net loss for the three months ended November 30, 2010 was $260,927 or $(0.01) per share (basic and diluted), as compared with a restated net loss of $855,499 , or ($0.04) per share (basic and diluted) for the three month period ended November 30, 2009.


Nine Months Ended November 30, 2010 and 2009





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




Nine Months Ended November 30,2010



2009Dollars


%



Dollars


%Revenues

$
823,865



100.0
%

$
739,849



100.0
%Cost of sales


921,025



111.8
%


623,289



84.2
%Gross profit


(97,160)



(11.8
)%


116,560



15.8
%Selling, general and administrative expenses


2,208,741



268.1
%


2,070,635



279.9
%Operating (loss)


(2,305,901
)


(279.9
)%


(1,954,075)
)


(264.1
)%Interest expense, net


(5,284
)


(0.6
)%


(1,604
)


(0.2
)%(Loss) on exchange


(834
)


(0.1
)%


2,799



(0.4
)%Indemnity income


70,021



8.5
%


0



0
%Gain (loss) on change in fair value of accrued derivative liabilities


1,780,991



216.2
%


(122,507
)


(16.6
)%Other income (expense)


(11,262)



(1.4
)%


2,525



0.3
%Income tax


0



0.0
%


0



0.0
%Net (loss)

$
(472,301
)


(53.7
)%

$
(2,072,862
)


(280.2
)%




Revenues.Revenues for the nine months ended November 30, 2010 were $823,865, which was $84,016, or 11.4%, higher than revenues of $739,849 for the nine months ended November 30, 2009.   During the nine months ended November 30, 2010, we sold product at prices which were significantly below our cost.  Thus, although the number of units sold increased from the 2009 to the 2010 period, because of our pricing structure, the increase in volume was not reflected in an increase in revenue. 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 nine months ended November 30, 2010, our cost of sales exceeded our revenues by $97,160 resulting in a negative gross margin of 11.79%, as compared with a gross profit of $116,560 or 15.75% for the comparable nine months of 2009. The negative gross margin reflects the lower pricing strategy discussed under “Revenues.”





Selling, General and Administrative Expenses.Selling, general and administrative expenses increased from $2,070,635 in the nine ended November 30, 2009 to $2,208,741 in the nine ended November 30, 2010, an increase of approximately 6.7%. This increase reflects higher expenses related to our marketing effort seeking to expand into other geographic regions.





Operating Loss. In the nine months ended November 30 2010, our loss from operations was $2,305,901, as compared to a loss from operations of 1,954,075 for the comparable period in 2009, an increase in our loss of approximately $351,826, or 18%.





25


Gain (Loss) 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. As a result of such provision, we incurred derivative liabilities. During the nine months ended November 30, 2010, we recognized a gain of $1,780,991 reflecting the change in fair value of the accrued derivative liabilities, as compared with a loss of $122,507 for the nine months ended November 30, 2009. The change reflects a difference in the valuation of the derivative liabilities during the period, using the Monte Carlo and Black-Scholes simulation models , take into effect a number of factors, including changes in the market price of the common stock.
  Other Income. Other income for the nine months ending November 30, 2010 was a loss of $11,294.  Other income was not material for the nine months ended November 30, 2009.





Net Loss. As a result of the foregoing, our net loss for the nine months ended November 30, 2010 was $472,301, or $(0.02) per share (basic and diluted), as compared with a net loss of $2,072,862, or ($0.15) per share (basic and diluted), for the nine month period ended November 30, 2009.


Liquidity and Capital Resources:





The following table sets forth information as to the principal changes in the components of working capital from November 30, 2010 to February 28, 2010:





Category

November 30,

2010


February 28,

2010


Change

(in $)


% ChangeCurrent assets:Cash and cash equivalents

$
227,525


$
255,884


$
(28,359
)


(11.08
)%Notes receivable, net


77,681



21,088



56,593



268.37
%Accounts receivable, net


145,431



103,472



41,959



40.55
%Other receivables


47,358



30,387



16,971



55.85
%Inventories


-



146,626



(146,626
)


(100.00
)%Prepayments


301,752



69,537



232,215



333.94
%Other current assets


36,289



20,761



15,528



74.79
%Current liabilities:Short-term debt


22,156



20,339



1.817



8.93
%Notes payable


374,403



157,109



215,294



138.31
%Accounts payable


140,329



70,000



70,329



100.47
%Other payable


466,078



556,163



(90,085
)


(16.20
)%Accrued liabilities


341,393



145,951



195,442



133.9
1%Due to related party


1,909,967



1,775,314



134,653



7.58
%Other current liabilities


170,372



2,370



168,002



7088.69
%Total current assets


836,036



647,755



188,281



29.07
%Total current liabilities


3,424,698



2,727,246



697,452



25.57
%Working capital (deficiency)


(2,588,662
)


(2,079,491
)


(509,171
)


(24.49
)%





Our working capital deficiency increased from a deficiency of $2.1 million at February 28, 2010 to a working capital deficiency of $2.6 million at November 30, 2010.





We have financed our operations principally through the capital markets as well as loans from company officers and directors. During the nine months ended November 30, 2010, we sold a total of 2,134,823 shares of common stock at $0.71 per share to four investors for an aggregate sales price of $1,515,725.





We have also relied significantly on loans from our officers and directors.  As of November 30, 2010, we owed a total of approximately $1.9 million to related parties – our chief executive officer, president, one of our directors and the president of one of our subsidiaries and three shareholders.  The borrowings do not bear interest and are payable on demand.





During the nine months ended November 30, 2010, we incurred  a negative gross profit of approximately $97,000, an operating loss of approximately $2.3 million and a net loss of approximately $472,000 and we used $1.4 million in our operating activities. These factors raise substantial doubt about our ability to continue as a going concern.  Management believes that actions presently being taken to obtain additional funding provide the opportunity to continue as a going concern. However, as a result of these factors along with our losses of approximately $2.6 million for the year ended February 28, 2010 and approximately $2.3 million for the nine months ended November 30, 2010, the need for us to restate prior year’s financial statements in a manner which showed a material adverse change from the previously reported quarterly results, the absence of financial controls, our low stock price and the absence of a strong market for our common stock, we may have difficulty raising additional funds in the equity market or from lenders.  Our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern, which adjustments, if made, would be significant.


26




Net cash flow used in operating activities was $1.37 million in the nine months ended November 30, 2010 as compared to net cash flow used in operating activities of $0.87 million in nine months ended November 30, 2009, an increase of $505,000. Net cash flow used in operating activities in the nine months ended November 30, 2010 was mainly due to our net loss of $2.25 million and our negative gross margin in the nine months ended November 30, 2010 and the gain on change in fair value of accrued derivative liability of approximately $1.8 million. Net cash flow used in operating activities in the nine months ended November 30, 2009 was mainly due to our net loss of and the gain on change in fair value of accrued derivative liabilities.
 
 Net cash flow used in investing activities was $211,156 for the nine months ended November 30, 2010 and $21,875 for the comparable period in 2009. For the nine months ended November 30, 2010, the cash flow used in investing activity was primarily to purchase $197,000 in property and equipment.





Net cash flow provided by financing activities was $1.54 million for the nine months ended November 30, 2010. We received proceeds from issuance of shares at the amount of $1.52 million and proceeds from loans from related parties in the amount of $42,757. Net cash flow provided by financing activities was $952,226 for the nine months ended November 30, 2009, which included proceeds from related parties at the amount of $36,378 and proceeds from issuance of common stock in the amount of $ 884,110.





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 November 30, 2010.





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 November 30, 2010.





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, management identified material weaknesses related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions and, and (iii) a lack of segregation of duties within accounting functions.





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





We became a reporting company in April 2009.  At the end of our fiscal year ended February 28, 2009, and until April 2009, when we completed the reverse acquisition, we were operating as three privately-owned companies whose operations were not consolidated for financial reporting purpose.  Our business is located in the Republic of China and our products are manufactured for us by third parties in the People’s Republic of China.  We began preparing to be in compliance with the internal control obligations, including Section 404, for our fiscal year ending February 28, 2009. During almost all of 2009 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





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to meet or apply U.S. GAAP requirements.  As a result, with the exception of certain additional persons hired at the end of 2009 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 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 the end of November 30, 2010.





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.




At or about the completion of the reverse acquisition, we entered into agreements with consultants pursuant to which we issued equity securities for services rendered.  Subsequent to the reverse acquisition, we completed a financing in which we issued stock and warrants.  These events presented complex accounting issues which were new to our financial staff.  Furthermore, we do not have a large accounting department and it has been difficult for us to hire qualified personnel who understand English and Chinese and are familiar with both U.S. GAAP and Republic of China GAAP.  Additionally, from the completion of the reverse acquisition until January 2010, our chief financial officer was the wife of our chief executive officer.  Further, in the course of preparing our annual financial statements, we learned that we were not able to adequately document key accounting items, including our revenue and cost of revenue.  As a result, our revenue for each of the quarters in the year ended February 28, 2010 was significantly overstated and we reported significant profits which are being restated as significant losses.  We are addressing these issues by reviewing and revising our internal accounting policies and procedures, expanding the resources allocated to our accounting department, and hiring outside accounting advisors.  We expect resolution of these matters may take several months.  Accordingly, based on the foregoing, the certifying officers have concluded that our disclosure controls and procedures are not effective at this time.





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.





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.





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Remediation and Changes in Internal Control over Financial Reporting





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





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





Limitations on Controls





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











PART II - OTHER INFORMATION





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





On September 1, 2010, the Company entered into contracts with one consultant pursuant to which consultants are to provide services in connection with the Company’s expansion into China for one year period.  Pursuant to the contracts, the Company issued 350,000 shares of common stock to the consultants.  The value of the shares, $63,000, is based on the closing price of the common stock at $0.18 on September 1, 2010, and is being amortized over the one-year term of the contracts commencing on September 1, 2010.




On September 10, 2010, the Company entered into contracts with one consultant pursuant to which consultants are to provide services in connection with the Company’s expansion into China for one year period.  Pursuant to the contracts, the Company issued 350,000 shares of common stock to the consultants.  The value of the shares, $52,500, is based on the closing price of the common stock at $0.15 on September 10, 2010, and is being amortized over the one-year term ofthe contracts commencing on September 1, 2010.




On October 1, 2010, the Company entered into contracts with one consultant pursuant to which consultants are to provide services in connection with the Company’s expansion into China for one year period.  Pursuant to the contracts, the Company issued 500,000 shares of common stock to the consultants.  The value of the shares, $90,000, is based on the closing price of the common stock at $0.18 on October 1, 2010, and is being amortized over the one-year term of the contracts commencing on October 1, 2010.




On November 25, 2010, the Company extended the contract with one consultant pursuant to which consultants are to provide services in connection with the Company’s expansion into China for another one year period.  Pursuant to the contracts, the Company issued 500,000 shares of common stock to the consultants.  The value of the shares, $90,000, is based on the closing price of the common stock at $0.20 on November 25, 2010, and is being amortized over the one-year term of the contracts commencing on July 1, 2011.




The issuance of these securities was exempt from registration under Regulation S of the Securities and Exchange Commission under the Securities Act of 1933 (the “Securities Act”).  The persons to whom the shares were issued are not “U.S. persons” as that term is defined in Rule 902(k) of Regulation S under the Securities Act, had acquired the common stock for investment purposes for its own respective 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.




In October 2009, the Company sold to an investor, for $700,000, (i) 1,000,000 shares of common stock and (ii) warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.50 per share.  The agreement provided that, if the Company sold shares of common stock at a price which is less than $0.70 per share, the Company would issue to the investor additional shares such that the investor’s purchase price per share would equal the lower price.  On December 8, 2009, the Company and the investor entered into an agreement pursuant to which (a) the Company issued 1,000,000 shares to the investor, and (b) the investor cancelled the warrants and reduced from $0.70 to $0.25 the price per share of common stock that would trigger the issuance of additional shares to the investor.




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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:      March 28, 2011

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







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