UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC  20549





FORM 10-K





[  ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934








[X ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the Transition Period from July 31, 2010 to December 31, 2010





Commission File Number 000-53590





SUNOVIA ENERGY TECHNOLOGIES, INC.


(Exact name of small business issuer as specified in its charter)





Nevada


(State or other jurisdiction of incorporation


or organization)


98-0550703


(IRS Employer Identification No.)


106 Cattlemen Road


Sarasota, Florida


34232


941-751-6800


(Address of principal executive office) (Postal Code) (Issuer's telephone number)











Securities registered under Section 12(b) of the Exchange Act:  None


Securities registered under Section 12(g) of the Exchange Act:


Common Stock, $0.001 par value








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





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





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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X] No []





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). Yes [X] No [ ]





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





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


Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [X]





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





The aggregate market value of the voting stock held by non-affiliates as of April 11, 2011 was $23, 514,786





Number of outstanding shares of the registrant's par value $0.001 common stock as of April 11, 2011: 904,681,802 .











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SUNOVIA ENERGY TECHNOLOGIES, INC.





FORM 10-K


For the Transition Period July 31, 2010 to December 31, 2010











Part I
PageItem 1.
Description of Business
3Item 1A.
Risk Factors
10Item 1B.
Unresolved Staff Comments
10Item 2.
Properties
11Item 3.
Legal Proceedings
11Item 4.
(Removed and Reserved)
11Part IIItem 5.
Market for Registrant's Common Equity Related Stockholder Matters and Issuer Purchase of Securities
11Item 6.
Selected Financial Data
13Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
13Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
13Item 8.
Financial Statements and Supplementary DataItem 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
23Item 9A.
Controls and Procedures
23Item 9A (T).
Controls and Procedures
23Item 9B.
Other Information
23Part IIIItem 10.
Directors, Executive Officers and Corporate Governance
24Item 11.
Executive Compensation
28Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
32Item 13.
Certain Relationships and Related Transactions, and Director Independence
33Item 14.
Principal Accounting Fees and Services
33Item 15
Exhibits, Financial Statement Schedules
34Signatures
35Financial Statements
F-1











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PART I


FORWARD-LOOKING INFORMATION





This Transition Report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) (the “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 words and phrases are intended to identify forward-looking statements. However, this is not an all-inclusive list of words or phrases that identify forward-looking statements in this Report.  Also, all 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 circumstances currently known by us. 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 discussed elsewhere in this Report.





We file reports with the Securities and Exchange Commission ("SEC"), and those reports are available free of charge on our Web site (www.sunoviaenergy.com) under "Investor Relations/SEC Filings." The reports available include our annual reports on Form 10-K, quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to those reports, which are available as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., 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. The SEC also maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.





We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this Report. We urge you to carefully review and consider all of the disclosures made in this Report.





ITEM 1.  DESCRIPTION OF BUSINESS





Overview





Sunovia Energy Technologies, Inc. was formed in 2007 through a reverse merger of our predecessor Sun Energy Solar, Inc., and Acadia Resources, Inc., a Nevada corporation. Sunovia, directly and through its wholly-owned subsidiaries, EvoLucia, Inc. and Sunovia Solar, Inc., is in the business of providing energy-efficient and sustainable energy solutions by implementing technology in three main areas:  light emitting diode (LED) lighting, solar energy and infrared. From its inception, the Company has pursued ways to commercialize advances in semiconductors in the energy industry that continually improve performance levels. Seeking to capitalize on the trends toward green and sustainable energy sources, the Company has pursued solutions through technological advances in semiconductors and other components of clean and sustainable energy delivery. Each of these technologies (LED, solar and infrared) rely upon the advancement of semiconductors; focusing on all three allowed the Company to maximize the potential value of its research and development investment by spreading risk across three areas  of the clean energy industry.





LED Lighting





LED lights are the most energy-efficient lighting source on the market today. Through our patented Aimed LED LightingTM technology, we have demonstrated that less overall light is needed if the light is correctly focused on the target area. We have identified an immediate opportunity, particularly in the outdoor lighting market, to supply high quality energy-efficient lighting solutions through our patented technology.  Our LED lighting subsidiary, EvoLucia, Inc., has developed several LED lighting products, primarily for the outdoor lighting industry, that utilize our Aimed OpticsTM technology. We sell these products to several market segments, including governmental entities (municipalities and military installations) and private businesses. We continue to develop and refine our products to serve the market and are actively pursuing alliances that will allow us to drive down the production cost of our products.





Solar





Due to its use of semiconductors, photovoltaic solar energy is considered by many scholars and industry analysts to be the eventual replacement for fossil fuels as the world’s primary energy source.  This market represents an enormous opportunity if commercially viable systems can be developed.





For several years, the Company actively pursued and developed a highly scalable solar CPV tracking system to be compatible with solar components made from III-V or II-VI semiconductor materials. In seeking to develop solar- powered systems that are commercially viable, we recognized the need for a more cost-effective solar component.









3




We engaged EPIR Technologies, Inc. to develop such a technology, and that alliance resulted in technology that established a world record for solar efficiency for CdTe technology. At this time, though the solar industry showed continuous improvement over a number of years, solar energy remains significantly more expensive than existing energy sources in those areas where an economically viable, reliable power grid already exists. (In the United States, for example, solar power costs approximately 54% more than the national average cost of energy in the existing power grid.) Thus, without subsidies or governmental mandates, solar energy is not commercially viable at this time, particularly in the current sluggish economic recovery.





In addition, the EPIR venture gave rise to a dispute and is currently the subject of litigation initiated by EPIR in which both parties seek damages and other remedies from the other. See Item 3, “LEGAL PROCEEDINGS.” In addition, the solar market has presented numerous obstacles and barriers to the Company’s development of commercially viable solutions. For these reasons, the solar technologies are not the primary focus for the Company at this time and are not expected to be a focus of the Company in the foreseeable future. See “MANAGEMENT’S DISCUSSION AND ANALYSIS.”





Infrared





EPIR, our co-venturer in the solar energy development, is highly respected for its knowledge in infrared semiconductor technologies, which seek to maximize solar energy at night. Shortly after engaging EPIR, with their assistance, we obtained a 10-year, $34 million contract with i3 Systems, a South Korean company, using EPIR’s infrared technology.  In the fiscal year ended July 31, 2010, we shipped our first $150,000 of product under this arrangement. As a result of the lawsuit with EPIR, however, we presently do not have a supplier for the contract, and no shipments of infrared product have been made since that time, nor are further shipments anticipated in the future.





The litigation with EPIR has made it impossible to supply infrared product under the i3 Systems contract. In addition, the infrared market has presented numerous obstacles and barriers to developing commercially viable solutions. For these reasons, the Company does not anticipate devoting significant resources to the infrared market in the foreseeable future.





Company History





In 2005, the founders of the Company sought to produce a flexible solar-powered LED substrate that incorporated solar panels, battery back-up and energy-conserving light-emitting diodes (LEDs). The use of energy-efficient LEDs would allow outdoor signage to use the least amount of energy to create light, conserving as much as possible of what was generated through the solar wafers, and its lightweight and flexible design would allow it to be displayed in many different areas without the need to be attached to a fixed power source. The technology would also decrease consumption of fossil fuels while increasing energy independence and national security.





The solar wafers commercially available in the early years of the Company’s existence lacked the efficiency that would be necessary for solar-powered LED signage to be a viable commercial reality, and these circumstances have not changed significantly in the last few years. In 2006-2007, engineering prototypes of the solar substrates were built and demonstrated at multiple meetings to gather marketing intelligence for the products. This led the founders through a process of identifying the significant future that would be associated with advanced semiconductors that not only could produce electricity by efficiently using the sun as a source, but also could do the reverse-- very efficiently produce general purpose lighting from LEDs, with nearly the same quality as sunlight, but efficiently using electricity as the source. In 2007-2008, Sunovia’s first engineering prototypes of LED lighting products were developed.





Clean energy and green industries have historically relied heavily upon government subsidies in order to advance, because the costs of those technologies are significantly higher than traditional energy sources. Recognizing that those subsidies would be limited in time and scope, the Company committed to researching and developing truly competitive solutions to provide cost-effective solar energy and LED lighting.





Initial Entry into Solar and Infrared Technologies





Solar





Through its association with Dr. Sivalingam Sivananthan, the Company sought to transfer advanced techniques for capturing infrared light into solar photovoltaic technologies, and thereby capture a broader spectrum of the sun’s light at the highest efficiencies and lower costs. Sunovia’s relationship with Dr. Sivananthan’s company, EPIR Technologies, was formalized in 2008 with the goal of leveraging his knowledge of infrared light detection to accelerate the commercialization of a highly efficient, low-cost solar technology and to become the exclusive sales and marketing arm for all products developed by EPIR Technologies, including infrared and biosensor products. Unfortunately, EPIR has not succeeded in moving its advanced technology from the laboratory to production.








4





Solar energy remains significantly more expensive than current energy sources. In order to create sufficient demand for renewable energy without relying on government subsidies, grid parity must be achieved. This core problem inhibits the adoption of solar as the dominant source of energy for the world’s power grids at this time. However,  some governments have made efforts to bridge this difference through subsidies. This political cycle is in turn affected by the world’s economies, where changes in policy make the future of subsidies uncertain. The year ending December 31, 2010 saw significant changes in U.S. policy on solar energy as America went from a period of possibly increasing subsidies to a clear shift away from subsidies. Unfortunately, the prices of competitive silicon panels from China were substantially reduced, making the CdTe technology developed by Dr. Sivananthan through our investment in EPIR much less competitive in the world market.





Infrared





In facing the challenges presented by the solar energy industry, management identified mercury cadmium telluride (HgCdTe) infrared sensors and systems as a technology that could be profitably commercialized without reliance on government subsidies or public policy shifts. However, external factors, including shifting U.S. export compliance guidelines and reductions in profit margins for the infrared materials, made this strategy difficult to implement. In addition, EPIR’s difficulty in moving from lab to production hindered this effort.





In light of the significant challenges facing the solar and infrared industries at this time and the difficulty EPiR has experienced in commercializing its technology, the Company is focusing its efforts at the present time primarily on developing and commercializing LED lighting products through its LED lighting subsidiary, EvoLucia, Inc. See “MANAGEMENT’S DISCUSSION AND ANALYSIS.”





LED Lighting





The lighting strategy initially consisted of two steps: first,  developing fixtures that utilize our Aimed LED LightingTM technologies, and second, a research program, initiated with Donggkuk University, geared to develop so called “perfect white” LEDs using zinc oxide instead of phosphors.





The search for a cost-effective, perfect white LED is considered an important step in LED adoption. LEDs produce amber, blue and red colors, and chemicals such as phosphors are added to get them to produce white light. The addition of such chemicals (currently phosphors) adds heat, reduces life, and reduces performance of LEDs. The results of the research we have funded in this area have not been sufficiently promising to warrant further commitment of resources. The Company discontinued all funding of this effort in 2009.





EvoLucia LED Lighting





EvoLucia, the Company’s wholly-owned LED lighting subsidiary, is focusing on (i) the roadway / walkway lighting market (“cobra head,” “shoebox”, “post-top” and “bell-top” products) and (ii) the area lighting market (utility lights, wall packs, canopy lights and parking garage lights). The outdoor lighting fixture market is estimated to be approximately $6 billion in 2010, according to Osram-Sylvania, a leader in the lighting industry.  There are currently over 200 competitors in the outdoor LED lighting market. Our Aimed OpticsTM technology potentially provides a competitive advantage in this market, as it uses less energy to put more light on the ground.





EvoLucia completed the basic design for most of its products in 2009. However, LEDs are semiconductors, and their performance is improving rapidly over time. That improvement drives the need to update product designs in order to remain competitive. We anticipate that this cycle of improvement in semiconductor performance followed by corresponding modifications in product design will continue for the foreseeable future.





The three most significant challenges facing the Company and EvoLucia in the outdoor light market are (a) developing a recognizable brand name, (b) expanding our distribution network, and (c) driving down the cost of manufacturing and selling our products. Each of these issues is a priority for the Company at this time and going forward.





Distribution Methods








LED Lighting





The Company has identified six primary distribution channels for its EvoLucia products, listed and discussed in more detail below, which it services through a network of manufacturers’ reps throughout North America and in various other countries:





1. Utilities,


2. Engineering Service Company (ESCO),


3. Commercial and Industrial (C&I),


4. Original Equipment Manufacturers (OEM),


5. Federal Government and


6. International channels.





5





1) Utility Market





NEMA (National Electrical Manufacturing Association) estimates that public utilities have installed and currently maintain in excess of 12.5million cobra head street lights, and 9 million decorative post-top pedestrian-scale street lights in the U.S. EvoLucia is developing a sales and marketing infrastructure focused on the electric utility market segment. There are more than 1,300 utilities in the U.S., comprised of approximately 100 investor-owned utilities, 250 municipal power companies, 930 rural electrical cooperatives and 40 State- or federally- owned utilities. All four types of utilities have distinct and independent internal organizations with input into street lighting equipment and specifications.





Utilities pay a lower price for energy than most of our customers, because they either generate the power themselves, or buy it wholesale. As a result, energy savings, which is one of the primary advantages of our products, is not as important to utility company customers. Additionally, as most of our lights are used during off peak hours, power companies typically would not benefit significantly from such energy savings.





In spite of these obstacles, the Company believes that the utility market presents significant opportunities if we are able to offer a product with a lower initial cost than our current products. We are directing significant efforts to reducing the cost of manufacturing our product in order to better serve this market.





2) ESCOs and Alternative Arrangements





Energy Service Companies (ESCOs) sell packages of enhanced energy-efficient equipment/services for use in newly constructed buildings, or as retrofits to existing systems. ESCOs typically provide a broad range of energy solutions, including design and implementation of energy savings projects, energy conservation, energy infrastructure outsourcing, power generation and energy supply and risk management. Typical energy-efficient products sold by ESCOs include lighting, water heating, HVAC, elevators, air conditioning and windows. ESCOs typically perform upfront, in-depth analyses of properties, design an energy-efficient solution, install the required elements and maintain the system to ensure energy savings during the payback period. The savings in energy costs often are used to pay back the capital investment of the project over a specified period. The opportunity for EvoLucia is to be the LED lighting provider in energy efficiency projects won by ESCOs.





The leading ESCOs in the United States include Siemens, Honeywell, Trane, Chevron, Florida Power and Lighting (FPL) and Johnson Controls. We are currently working with several ESCOs on individual projects.  However, because each project includes an additional layer of cost associated with the ESCO contractor, it is difficult for our products to be competitive on overall price.





In addition to ESCOs, which operate from a formal regulated structure, an industry of energy consultants with various professional designations have entered into the market place in recent years. We have developed relationships with a number of these consultants and continue to work with them to generate sales.





3) Commercial and Industrial (C&I)





The C&I market is one of the most visible portions of the lighting market. Typically, architects or engineers design and specify lighting systems primarily for new construction, and the projects are sent out for bid. Electrical contractors, usually under contract with a general contractor, purchase the “lighting package” from electrical distributors. In this market, lighting fixture manufacturers are represented by manufacturer’s rep agencies. The Company currently has relationships with more than 40 rep agencies throughout the U.S.





The C&I market has recently consolidated and is currently dominated by a few Tier 1 lighting companies with large well-established direct sales forces: Osram-Sylvania, GE, Lithonia (Acuity), Hubbell (Beacon, Varon), Cooper Lighting (IO Lighting) and Philips (Genlyte). In addition, each of those lighting companies has its own agency network, with roughly 75–80 regional sales reps covering the U.S. market. The Tier 2, 3 and 4 companies typically sell their products through representation by one of the Tier 1 companies. In addition, U.S. companies face significant competition from international companies in this market, the largest of which is Leotek, a Taiwanese company.





The Company is aggressively pursuing this market; however, fierce competition in this market results in slim profit margins. In order to compete more effectively in this market, we must reduce the cost of producing our product. Although our product delivers higher quality, more efficient light through the Aimed OpticsTM technology, this market is currently unwilling to pay more for additional quality. We have several initiatives underway to reduce the cost of producing our product to address the challenges in this and other markets that arises from cost of production.





4) Federal Government





All departments of the federal government, other than the Department of Defense, are required by the Energy Act of 2007 to use lighting with the lowest payback model. In order to sell any products to the U.S. Government, companies need approval from the General Services Administration (GSA) and must obtain a GSA authorization number. Companies with GSA authority are eligible to be included in the GSA purchasing catalog where any Department or Agency may purchase products up to $75,000 without an RFP or competitive bid. The Company was awarded a GSA schedule in February 2010.




5)  Original Equipment Manufacturers (OEMs)





Due to both the size of the overall market and fragmentation in the lighting business, many lighting companies, including EvoLucia, act as suppliers to companies in the industry (OEMs) as well as a seller to the end user. EvoLucia initially participated in this market by creating light engines for other manufacturers.






6





In September 2008, Sunovia and Beacon Products, LLC (now part of Hubbell Lighting, Inc.) formalized a partnership for the developing and marketing unique LED products. The product development will include critical components of energy-efficient LED lighting fixtures and outdoor markets. Sunovia has provided research, engineering, development, design, test services, sales and marketing support for the creation of the products. Hubbell has provided general lighting industry expertise and market intelligence that is critical to the design, performance and test requirements that are needed for the design and sale of the products. We are in negotiations with several OEMS for additional arrangements to distribute our products.





6) International





The international market represents a large opportunity for EvoLucia as many countries do not have the installed power generation and distribution infrastructure that exists in the U.S., and often have power costs that are significantly higher than in the U.S. This market presents a challenge in addressing each country’s specific requirements, which often include certifications that we do not currently have. We are in active discussions with several countries to provide lighting solutions for specific projects. The international market did not represent a significant portion of sales in the most recent fiscal year; however, certain international markets are growing and this segment could contribute significant sales in the future.





Solar and Infrared





Our solar and infrared technologies have not been developed to the point of commercial viability. Therefore, we do not have distribution networks or methods in these areas of our business.





Status of New Products and Services





Roadway Lighting Products





The Company’s current product offerings in the Roadway Lighting Market include (i) a Cobra Head and a Shoebox light in several different wattages, light configuration and colors of light launched in July 2009, (ii) a decorative Fairview “Bell”-shaped light (installed in the Fairview, TX installation) and a decorative “Post Top” product. In development are several other types of Cobra Heads for larger installations and Shoeboxes for parking lots, each of which is projected to require approximately $500,000 in development and tooling costs.





Cobra Head and Shoebox Roadway Lights





The cobra head is the most common streetlight in the United States, with 12.5 million installed annually in the U.S., and an estimated 40 million internationally. The Shoebox utilizes the same basic technology as the cobra head with a different housing. We began developing an LED replacement/retrofit for the cobra head street light in 2007 Our consultant at that time was Chairman of the Standard Practice Sub-committee of the IES Roadway Lighting Committee which oversees RP-8, the American National Standard Practice for Roadway Lighting and the designer of the cobra head roadway light fixtures that represent over 45% of the cobra heads currently installed in the U.S. EvoLucia’s LED cobra head luminaires are the most energy-efficient (up to 75% less energy use), environmentally-friendly and maintenance-free (up to 12 years) fixtures to light roads, highways and thoroughfares available on the market at this time.





In the last year, the Company completed the development of a number of  IES Type-II (designed for 2 lane and wide walkway installations) and Type III distribution cobra head product in standard 75 and 100 watt configurations designed to replace existing 150 watt metal halide (MH) and high pressure sodium (HPS) products. The Company has received UL certification for some of these products.





EvoLucia’s cobra head products replace/retrofit existing cobra head installations without the need to move utility poles or change existing infrastructure, so customers can cost-effectively upgrade with minimal change to existing hardware. The Company has completed designs to convert these cobra head fixtures to architectural shoebox style fixtures as well, and we anticipate this product to represent increasing portions of sales in the future.





Decorative “Fairview Bell” and “Post Top” Walkway Lights





Sunovia has developed two decorative LED lights, (i) the Fairview “Bell Top” light currently installed in the Company’s Fairview, TX installation and (ii) a “Post Top” version. In April 2009, the Company completed Phase I of its LED lighting installation in Fairview, TX. The Company designed the entire lighting system, including the spacing and height of the light poles, specifically for the four-lane Fairview Parkway and it features 82 EvoLucia lights.





The lights installed in the Fairview Roadway installation are designed predominately for walkways in municipalities and campuses. The Fairview lights are available in 48W or 225W configurations and replace 150W or 400W MH or HPS lamps, respectively. The Fairview luminaires utilize EvoLucia’s Aimed OpticsTM technology, and focus light through individually aimed lenses for uniform, targeted light. The Fairview “Bell Top” uses up to 60% less energy and the decorative “Post Top” uses up to 75% less energy than existing lights, and both are maintenance free for over 50,000 hours.





Parking Garage Lights (PS14 and PS9)





This market has approximately 3.1 million parking lot/garage lighting fixtures, (per the U.S. Dept of Energy 2008 Study titled “Energy Savings Estimates of Light Emitting Diodes – Niche Lighting Applications”) of which we estimate 500,000 are replaced each year and has a market size of $100 million annually in the United States. Sunovia’s first fixture in this area, the PS14, comes in 60- and 90- watt configurations and is designed to replace 175-watt MH and 150-watt HPS lights. The Company’s generation 2 design of the PS9 is a higher-end product with a shallower, 9-inch depth. This design has been specifically requested by two OEMs to produce a flatter light pattern with less glare. Production of the new PS9 is expected to begin during the 3rd  quarter of 2011.







7




Utility Lights and Canopy Lights





Our Utility Light (UTL-1), used for illuminating sidewalks, pathways, landscaping, storage areas, flag poles, statues, signs and monuments, is available in 15- and 24- watt configurations, use up to 75% less electricity than incandescent, quartz or metal halide fixtures and will be maintenance free for more than 10 years.





EvoLucia’s Canopy Light (CAN12), used for lighting exteriors, entryways, breezeways, walkways, perimeters, parking garages, storage areas and industrial / commercial spaces is available in 36- and 50-watt configurations, and is designed to replace 175 watt MH and 150 watt HPS lights.




Additional Products





Our LP3 Light Pack, designed for corridors, closets, cabinets, attics and residential garages, has been redesigned to come in 15- and 30-watt configurations and replace 75-watt incandescent fixtures with a 75% increase in efficiency, a significant increase in life expectancy and no maintenance for up to 15 years. Tooling has been purchased and this product is under production.





Dependence on Customers





During the five-month period ended December 31, 2010, we had aggregate sales of $548,018 to 2 customers, which sales individually represented more than 10% of the Company’s net revenues. Also, for that period, 34% of net accounts receivable were due from 1 customer.





During the year ended July 31, 2010, we made sales aggregating $1,004,916 to four customers, which sales individually represented in excess of 10% of the Company’s net revenues. At July 31, 2010, approximately 48% of net accounts receivable was due from one customer. We were dependent on Hubbell Lighting during 2009, which represents 61% of the $996,080 sales we had during the year ended July 31, 2009.





Given that 56% of our business arose from Federal government sources for the five months ended December 31, 2010 and 30% of our business derived from those sources in the fiscal year ended July 31, 2010, any change in government spending patterns may ultimately have a significant effect on our Company as well. The development of new products potentially will reduce our risks in this area.





PATENTS





The Company, including its subsidiaries and affiliates, currently has the following patents issued and   patents pending relating to technologies in solar, LED lighting, LEDs, and other components.





U.S. Patent Applications (including PCT applications with no corresponding pending US application):





Title
Application Number
Filing Date/ Priority Date
StatusStreet Light Retrofit Assembly
29/361,123
May 5, 2010
PendingSolid State Outdoor Overhead Lamp Assembly
61/325,116
April 16, 2010
PendingMethods and Apparatuses For Transferring Heat From an LED Luminaire
12/706,620
Feb. 16, 2010/ Feb. 16, 2009
PendingSolid State Lighting Unit Incorporating Optical Spreading Elements
12/767,698
April 26, 2010/ April 24, 2009
PendingSolid State Luminaire With Reduced Optical Losses
12/769,521
April 28, 2010/ April 28, 2009
PendingSolid State Luminaire Having Precise Aiming and Thermal Control
12/769,556
April 28, 2010/ April 28, 2009
PendingRetrofit System For Converting an Existing Luminaire into A Solid State Lighting Luminaire
12/769,627
April 28, 2010/ April 28, 2009
PendingLight Units with Communications Capability
11/760,464
June 8, 2007/ Sept. 10, 2004
PendingLED Light Unit With Battery Back-up, Communications and Display
12/027,232
Feb. 6, 2008/ Feb. 6, 2007
PendingLED Light Unit With Battery Back-up And Internal Switch State Detection
12/594,932
April 7, 2008/ April 6, 2007
PendingModular Solar Panel System
12/594,933
April 7, 2008/ April 6, 2007
PendingMethod and System for Collecting and Optically Transmitting Solar Radiation
12/598,412
May 1, 2008/ May 1, 2007
PendingLED Heat Sink and Lamp Assembly
12/685,571
July 14, 2008/ July 12, 2007
PendingLED Lamp Assembly with Enhanced Cooling by Induced Air Flow
PCT/US09/46023
June 2, 2009/ June 2, 2008
PendingLight Unit with Output Pattern Synthesized from Multiple Light Sources
PCT/US09/49629
July 2, 2009/ July 2, 2008
PendingFormation of Large Arrays of Zinc Oxide Nanostructures Using Electro disposition**
U S Application 12/126,671
July 3, 2008
PendingSuper Bright Light Emitting Diode of Nanorod Array Structure Having InGaN Quantum Well and Method for Manufacturing the Same**
US Patent number 7,132,677
November 7, 2006
Pending


** = patents arising from the Company’s Zinc Oxide project with Donggkuk University in South Korea








8





Foreign Applications (including PCT applications):





Title



Application Number
Filing Date/ Priority Date
StatusMethods and Apparatuses For Transferring Heat From an LED Luminaire

WIPO

PCT/US10/24321
Feb. 16, 2010 /  Feb. 16, 2009
PendingSolid State Lighting Unit Incorporating Optical Spreading Elements

WIPO

PCT/US10/32443
Apr. 26, 2010/  Apr. 24, 2009
PendingSolid State Luminaire With Reduced Optical Losses

WIPO

PCT/US10/32818
Apr. 28, 2010/ Apr. 28, 2009
PendingSolid State Luminaire Having Precise Aiming and Thermal Control

WIPO

PCT/US10/32827
Apr. 28, 2010/ Apr. 28, 2009
PendingRetrofit System For Converting an Existing Luminaire into A Solid State Lighting Luminaire

WIPO

PCT/US10/32857
Apr. 28, 2010/ Apr. 28, 2009
PendingLED Lamp Assembly with Enhanced Cooling by Induced Air Flow

WIPO

PCT/US09/46023
June 2, 2009 / June 2, 2008
PendingLight Unit with Output Pattern Synthesized from Multiple Light Sources

WIPO

PCT/US09/49629
July 2, 2009 / July 2, 2008
PendingLight emitting diode and its Manufacturing Method

Japan

Application No. 2004-36604

Registration No. No. 4160000
February 13, 2004
RegisteredMethod for forming Gan Nano Rod using HVPE growth

Korea

Registration No. 10-0693130
March 13, 2007
RegisteredMethod for forming Single Rod Gan PN Junction LED

Korea

Registration No. 10-0693129
March 13, 2007
RegisteredField Emission Display Using Gan Nanorods

Korea

Registration No. 10-0502817
July 21, 2005
RegisteredMethod of Forming Nanorods Using a Chemical Vapour deposition Apparatus for Fabricating Nano Rods and Nonrods or Nano Wires Using the Same Apparatus

Korea

Registration No. 10-0789652
January 2, 2008
RegisteredMethod for Forming Gallium Nitride Layer with Fewer Defects

Korea

Registration No.: 10-0525725
November 3, 2005
RegisteredMethod for Fabricating single Crystalline Gallium-Nitride Substrate by Using Galium-Nitride Nanorod

Korea

Registration No.: 10-0499814
July 7, 2005
RegisteredElectroluminescent Device, Fabrication Method, and Light Emitting Method for Realizing Multi-Color and White-Color Emission

Korea

Registration No.: 10-0755337
September 7, 2005
Registered











9





Need for Government Approval of Principal Products and Services





We do not require government approval to sell any of our products except to export infrared products. However, in certain instances our customers may desire carbon and tax credits associated with the use of our products, which requires governmental approval. As discussed in the “Status of New Products and Services” section, we have obtained approval to sell infrared products to South Korea, but must obtain additional export licenses for any future shipments. Each additional shipment would require an additional export license. If additional shipments of the infrared technology are to be made, either the Company or EPIR would be required to bear the costs of obtaining such licenses. The Company does not anticipate exporting additional infrared products in the foreseeable future.





Effect of Existing or Probable Government Regulations





We are not aware of any existing or probable governmental regulations that may have a material effect on the normal operations of our business. With respect to lighting, the Energy Independence and Security Act of 2007 (EISA 2007) requires that each Federal agency ensure that major replacements of installed equipment (such as heating and cooling systems) or renovation or expansion of existing space employ the most energy-efficient designs, systems, equipment, and controls that are life-cycle cost-effective. EISA 2007 sets several additional mandates regarding procurement of energy-efficient products. We build products and conduct business in a manner intended to meet these standards when we sell into the markets where they are applicable.





Additionally, the American Recovery and Reinvestment Act of 2009 (ARRA) has a number of provisions for U.S. manufacturing which apply primarily to our LED lighting products. Compliance with ARRA is necessary in order to bid for certain projects and allows for direct purchase without formal bid in other projects, which reduces the cost of sale to the Company and allows for quicker revenue generation on those projects for which a bid is unnecessary. Based on current interpretations of this complex set of rules and the factors underlying the manufacture and assembly of its LED lighting products, the Company believes that its LED lighting products are ARRA compliant.





Amount Spent on Research and Development





For the five months ended December 31, 2010, the Company incurred no research and development expense, compared to $5,122,477 for the comparable period the previous year. The Company ceased investing in solar and infrared in July, 2010.





For the fiscal year ended July 31, 2010, the Company paid EPIR an aggregate of $7,145,723 for research and development of the solar and infrared technologies. This amount included cash in the amount of $1,000,000 and shares of common stock of the Company with a fair value of $ 5,876,030 on the date of issuance paid to EPIR and other expenditures of $269,693.





For the fiscal year ended July 31, 2009 the Company paid EPIR an aggregate of $6,094,626 for research and development of the solar and infrared technologies. This amount included cash in the amount of $3,500,000 and warrants and shares of common stock of the Company with a fair value of $2,594,626. In addition, in 2009, the Company paid $200,000 for research at Dongguk University relating to zinc oxide LEDs.





Costs and Effects of Compliance with Environmental Laws





Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will directly impact our planned future. Based upon our current product mix and the markets in which we sell them, there are no environmental laws that require our compliance that we anticipate to have a material effect on the normal operations of our business. Conversely, complikance with enviornmental laws has a positive effet on the demand for our products, as we offer "Dark Sky " compliant and "Turtle-Friendly" products.




Employees





As of April 11, 2011, we had 12 full-time employees. We have not experienced any work stoppages and consider relations with employees to be good.





ITEM 1A. RISK FACTORS





As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item.




ITEM 1B. UNRESOLVED STAFF COMMENTS





As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item.






10







ITEM 2. PROPERTIES





We currently lease an operating facility at 106 Cattlemen Road Sarasota, FL 34232. This facility is under a five year and six month lease. The lease requires monthly rent, including sales tax, of approximately $10,445. The building consists of 17,252 square feet of laboratory, warehouse and office space. The facilities are in good condition and are adequate for small scale commercialization of our products. We are participating in an incentive-based grant program through Sarasota County which resulted in an incentive of $50,000 in fiscal year 2009 and that could result in an additional incentive payment of $50,000 if certain conditions, relating particularly to adding employees and their average annual wage, are met over the next two years.





Prior to June 15, 2010, we leased an operating facility at 6408 Parkland Drive, Sarasota, Florida 34243. This facility was under a one- year extension through October 31, 2010, prior to our termination effective June 15, 2010. The lease required a monthly rent of approximately $5,585 which included tax. The building consisted of approximately 5,316 square feet of laboratory, warehouse and office space.





ITEM 3. LEGAL PROCEEDINGS





From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.





We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results, other than as described below:





EPIR Litigation





The Company is a party to a lawsuit arising out of its Research, Development and Supply Agreement with EPIR Technologies, Inc. (“EPIR”). A suit was brought by EPIR in August, 2010, and seeks an unspecified amount of damages and other unspecified equitable relief. The Company filed certain counterclaims against EPIR and certain other parties, including Sivananthan Labs, Inc., an affiliate of EPIR and its principal, Dr. Sivananthan. Each of the parties to the litigation has brought numerous claims and counterclaims against each other, and several motions to dismiss certain claims have been filed and are pending.





The litigation is in the early stages of motions, and discovery has not yet begun. The outcome of the litigation is uncertain, and the potential damages that may be awarded to any of the parties cannot be estimated with any accuracy at this time.





The Company has been billed a total of $471,047 and has paid $195,365 in legal fees in this case as of April 10, 2011. The total cost of the litigation cannot be estimated at this time.





Litigation with Supplier





The Company is defending a lawsuit brought by a supplier of a component part of the EvoLucia LED light fixtures. The suit alleges that the Company owes a re-stocking fee for the return of certain inventory. The plaintiff has alleged damages in excess of $100,000. The Company believes it has substantial defenses to this lawsuit and intends to vigorously defend it. The lawsuit is in the early stages of pleadings, and the outcome of this case is uncertain at this time. The Company has incurred no significant legal fees to date in this case.





ITEM 4. (REMOVED AND RESERVED)





Not applicable.





PART II





ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





Market Information






11







Our common stock is quoted on the OTC Bulletin Board under the symbol "SUNV". For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.





Calendar 2010


Calendar 2009High


Low


High


LowFirst Quarter

$
.13


$
.09


$
.20


$
.05Second Quarter

$
.09


$
.05


$
.11


$
.06Third Quarter

$
.06


$
.03


$
.08


$
.03Fourth Quarter

$
.05


$
.02


$
.18


$
.09





Holders





As of April 11, 2011, we had approximately 1,518 record holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of our stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. Our transfer agent is Island Stock Transfer, Inc. 100 Second Avenue South, Suite 705S, St. Petersburg, Florida 33701.





Dividends





There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends if, after giving effect to the distribution of the dividend:





● we would not be able to pay our debts as they become due in the usual course of business; or


● our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.





We have not declared any dividends, and we do not anticipate declaring any dividends on our common stock in the foreseeable future.





Recent Sales of Unregistered Securities





On August 25, 2010, a convertible debenture in the face amount of $1,000,000 dated July 31, 2010, was converted for 64,516,127 shares of common stock which settled the obligation in full.





Also, on August 30, 2010, the Company sold an aggregate of 60,125,000 shares of common stock at $0.02 per share for an aggregate purchase price of $1,202,500.





On August 31, 2010, the Company issued 1,000,000 common shares to a consultant of the Company in payment for services.





On September 1, 2010, the Company issued 882,488 shares of its Common Stock to employees and consultants of the Company upon the exercise of stock options previously granted.





On September 1, 2010, the Company issued 2,870,000 common shares to an entity controlled by its chairman in settlement of an obligation under a royalty agreement.





On September 27, 2010, the Company sold an aggregate of 500,000 shares of common stock at $.02 per share for an aggregate purchase price of $10,000.





On September 28, 2010, the Company sold an aggregate of 16,500,000 shares of common stock at $.02 per share for an aggregate purchase price of $330,000





On September 28, 2010, the Company issued 87,500 common shares in payment for services.





On October 5, 2010, the Company sold an aggregate of 16,025,000 shares of common stock at $.02 per share for an aggregate purchase price of $320,500.





On October 13, 2010, the Company sold an aggregate of 4,500,000 shares of common stock at $.02 per share for an aggregate purchase price of $90,000.





On October 14, 2010, the Company issued 2,063,667 shares of common stock as payment for services.





On October 15, 2010, the Company sold an aggregate of 7,000,000 shares of common stock at $.02 per share for an aggregate purchase price of $140,000.





On October 29, 2010, the Company sold an aggregate of 25,000,000 shares of common stock at $.02 per share for an aggregate purchase price of $500,000 to an officer of the Company.








All of the offers and sales of securities listed above were made to accredited investors, affiliates or executive officers of the Company, and the Company relied upon the exemptions contained in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated there under with regard to those sales. No advertising or general solicitation was employed in offering the securities. The offers and sales were made to a limited number of persons, each of whom was an accredited investor, or an executive officer of the Company, and transfer of the common stock issued was restricted by the Company in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above referenced persons, we have made independent determinations that each of the investors were accredited investors and that each investor was capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.






12







Item 6. Selected Financial Data





As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item 6 Selected Financial Data.




ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The following information should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. Statements made in this Item 7, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-K that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements in this report.





You should read the following information in conjunction with our financial statements and related notes contained elsewhere in this report. You should consider the risks and difficulties frequently encountered by early-stage companies, particularly those engaged in new and rapidly evolving markets and technologies. Our limited operating history provides only a limited historical basis to assess the impact that critical accounting policies may have on our business and our financial performance.





Overview





In fiscal year 2010, the Company faced obstacles to developing its solar and infrared technologies, arising from cash flow constraints, changes in the solar market that lengthened the time horizon in which that technology will become economically viable and shifts in our alliances with strategic research partners. See “Description of the Business – Solar and -Infrared.”  The Company is uncertain whether these technologies could yield valuable opportunities in the future; in addition, the Company does not have sufficient resources to pursue them aggressively in the near-term. Current market conditions in the solar market particularly indicate that even aggressive pursuit of the technology would not yield profitable operations in that segment for a number of years to come, if at all. By contrast, the LED lighting market presents an immediate opportunity for revenue growth and ultimate profitability. The Company has shifted its focus over the course of fiscal year 2010 to the LED lighting market, particularly outdoor and area lighting, and anticipates continuing that focus for the foreseeable future.





For the five months ended December 31, 2010, the Company had a net loss of $3,898,336, as compared to a net loss of $8,352,200 for the five months ended December 31, 2009, or a decrease of $4,453,864 (53%). The decrease resulted from the elimination of research expense with EPIR Technologies, Inc. for the period ended December 31, 2010 compared to the same period in 2009, and $1,358,131 in derivative losses in the period ended December 31, 2009, offset by increases in general and administrative expenses related to equity compensation. The derivative  losses resulted from our sale of convertible debentures, as explained in Note A and Note P of the financial statements. See “Other Income and Expenses”, below. The net loss from operations for the five months ended December 31, 2010 was $3,855,952 as compared to a net loss from operations in the five months ended December 31, 2009 of $6,810,291, or a decrease of 43%. The significant factors contributing to this operating loss are discussed in more detail below under “Results of Operations.”





For the year ending July 31, 2010, the Company had a net loss of $20,518,548, as compared to a net loss of $14,471,361 for the previous fiscal year, or an increase of $6,047,187 (42%). Approximately 60% of the increase resulted from an impairment of the investment in EPIR of $3,680,385, and $1,663,539 in derivative losses. These losses resulted from our sale of convertible debentures, as explained in Note A and Note P of the financial statements. See “Other Income and Expenses”, below. The net loss from operations for the year ended December 31, 2010 was $15,127, 533 as compared to a net loss from operations in the year ended December 31, 2009 of $14,356,440, or a decrease of 57%. The significant factors contributing to this operating loss are discussed in more detail below under “Results of Operations.”





13





Results of Operations





The following table sets forth the relationship to total revenues of principal items contained in the statement of operations of the consolidated financial statements included herewith for the five-month periods ending December 31, 2010 and December 31, 2009.





2010


2009

(unaudited)Sales

$
1,067,903


$
802,309Cost of Sales


1,218,407



889,383Selling, General & Administrative Expenses


3,705,448



1,774,888Research and Development Expenses


-0-



5,122,477Total Operating Costs and Expenses


3,705,448



6,897,365Operating Loss


(3,855,952
)


(6,810,291
)Impairment of Investment in EPIR


-0-



-0-Interest Income (expense)


(42,384
)


9,610Derivative Loss


-0-



1,358,131Net Loss

$
(3,898,336
)

$
(8,352,200
)





Five months ended December 31, 2010 as compared to Five months ended December 31, 2009





Revenues





Revenues for the five months ended December 31, 2010 were $1,067,903, as compared to 802,309 for the five-month period ending December 31, 2009, which represented an increase of approximately 33%. All of the Company’s sales originated from its LED lighting division, and all of the increase in revenue was a result of sales of LED lighting fixtures.





A number of initiatives were begun in 2010 or continued from the prior year that contributed to the increases in sales for the year, in particular:





1. In the five-month period ending December 31, 2009, the Company completed its sale of Cobra Head lights to Camp Lejeune, a military base in North Carolina. Revenue from the sale was $240,530 or approximately 33% of total sales revenue for the five-month period ended December 31, 2009. The Company sold this project at a discounted price and determined to take a loss leader on this project in order to demonstrate the product with a view toward generating additional business from this particular base and from other military installations. The Company sought to build from this advantage and engaged a retired military officer to assist in its marketing efforts in the area but the military channel only represented $58,310 or 5% of the company’s sales for the five months ended December 31, 2010.





2. The Company developed relationships with energy service contractors, an emerging business model of companies that sell expertise in energy savings over a life cycle. The Company’s LED lighting fixtures are designed to provide energy savings over a life cycle, making this an attractive area for future growth. During the five months ended December 2010, the Company generated approximately $550,000 in sales from these relationships. This sector contributed approximately $95,000 to revenues for the five months ended December 31 2009.





3. The Company continued its relationship with Hubbell Lighting, a large OEM, through sales of light engines. Sales from this relationship were $120,000, or approximately 10% of total sales for the five months ended December 31, 2010, compared to $195,000 (23%) of sales for the five months ended December 31, 2009. The decline in sales for 2010 was due to the loss of a large customer by Hubbell. In addition, we were notified by Hubbell that they intend to return approximately $100,000 of light engines that were shipped in late 2010. We are currently in negotiation with Hubbell regarding this matter.





4. The Company actively bids on lighting projects for municipalities, a significant market segment for our LED lighting products. For the five months ended December 31, 2010, projects for municipalities resulted in sales of $140,000, which represented 13% of total sales for the period, as compared to $40,000 (5%) the five months ended December 31, 2009. This segment did not generate profit for the Company in 2010, due largely to highly competitive pricing and specialized requirements that increase our costs of sale.





5. The Company sold $165,000 of Infrared wafers under its agreement with i3 Systems for the five-month period ending December 31, 2009; however, the cost of sales exceeded the revenue on this sale. Due to the lawsuit with EPIR, there were no such sales for the five-month period ending December 31, 2010.There was no gross profit from these sales.





Gross Margin Profit





The Company had a gross margin loss of 14% for the five months ended December 31, 2010, as compared to a gross margin loss of 11% for the five months ended December 31, 2009.  A number of factors contributed to this circumstance, particularly:


·
The additional costs associated with developing, producing and delivering updated products. The LED market is in transition, and although technological improvements in components ultimately favor the industry, additional cost is needed to upgrade product for technological change.





·
Several of our distribution channels represent market sectors in which sales are driven almost entirely by low price and cost savings realized. Our products provide additional functionality not available in other products but they are consequently more expensive than other lighting products and therefore do not compare favorably in market sectors that are driven entirely or substantially by cost.





·
In order to more effectively negotiate prices with suppliers, the Company needs higher sales volumes than it is currently experiencing.






14







Expenses





Overall expenses decreased substantially in absolute and percentage terms for the five months ended December 31, 2010 compared to the five months ended December 31, 2009. This decrease of $3,191,917, or 46%, was primarily from the decrease in research on solar, offset by increases in noncash expenses related to compensation costs.





The major categories of expense for the Company are discussed individually below.





Research and Development





Research and development expenses are primarily associated with our solar and infrared technology efforts. The vast majority of R&D expenses of the Company have been paid to EPIR Technologies, Inc. to develop the solar and infrared technologies discussed elsewhere in this report. See “Item 1 Description of the Business – Company History -- Initial Entry into Solar and Infrared Technologies.” R&D expenses for 2010 totaled $0 for the five months ended December 31 in 2010, compared to $5,122,477 for the five months ended December 31 in 2009.





The five-month period ending December 31, 2009 began with promising developments in our solar program. Early in the year, we announced an unverified world record in thin film efficiency resulting from the technology developed with EPIR. In addition, we shipped our first order for infrared wafers under the i3 Systems contract.





Based on the current climate and the status of the litigation with EPIR, the Company does not anticipate expending significant funds on research and development in the solar or infrared technologies in the foreseeable future.





The Company anticipates continuing to develop its LED technology to support its LED lighting business. See “MANAGEMENT’S DISCUSSION AND ANALYSIS.”





Selling, General and Administrative Expenses





Selling, general and administrative expenses increased to $3,705,448 in the five-month period ending December 31, 2010 from $1,744,888 for the five-month ended December 31, 2009. The major components are discussed below.





Product Development





Product development costs were $812,625 for the five months ended December 31, 2010, compared to $867,236 for the five months ended December 31, 2009, a decrease of $54,611 or approximately 6.3%. The nature of the expenses changed over the 2010 fiscal as the Company moved from creating original designs in 2009 to improving those designs and keeping pace with technological changes in 2010. We anticipate the need to invest in developing the next generation of our products in order to compete effectively in our markets.





General and Administrative





General and administrative expenses are the expenses of operating the business on a daily basis that are not related directly to cost of goods and include managerial salaries, legal fees and rent and utilities. For the five months ended December 31, 2010 we spent $2,534,912 in this area, compared to $699,140 for the five months ended December 31, 2009 an increase of $1,835,772. Among the factors reflected in this increase is $400,000 of legal fees associated with the EPIR lawsuit, and non-cash stock and stock options expense of $1.6 million to the Company’s executives and consultants.





Sales and Marketing Costs





Sales and marketing costs, totaled $357,911 for the five months ended December 31, 2010, as compared to $208,512 in for the five months ended December, 31 2009, representing an increase of $149,399 or 72%. The increase reflects the addition of sales staff and an increase in commissions paid on the increase in sales.





15





Other Income and Expenses





Other income and expense reflects interests costs (net of interest income), including derivatives and impairment costs, as discussed below:





Interest expense for the five months ended December 31, 2010 was $42,384 compared to $9,610 of interest income for the five months ended December 31, 2009. This was due to the increased borrowing for the five months ended December 31, 2010 compared to the five-month period ended December 31, 2009.





We had interest expense and derivative expense of $1,358,131 on the sale of convertible debentures for the five months ended December 31, 2009 compared to $-0- for the five months ended December 31, 2010, when we sold no convertible debentures. The $1,000,000 of outstanding debentures outstanding at September 1, 2009 were converted into 30,992,493 shares on September 28, 2009. The $1,000,000 in debentures outstanding at July 31, 2010, and the related interest and derivative liability were converted into 64,516,127 common shares in September, 2010.





Liquidity and Capital Resources





The Company’s cash flow from operations is insufficient to meet its current obligations. In fiscal year 2010, the Company relied upon additional investment through sales of common stock and debentures in order to fund its operations. The Company anticipates the need to raise significant amounts of capital in order to fund its operations in the next fiscal year.





Cash Flows and Working Capital





As a result of losses we have incurred to date, we have financed our operations primarily through equity and debentures. As of December 31, 2010, we had $1,285,575 in cash and cash equivalents. We had receivables, net of allowances, of $491,740 and inventory of $653,307 and our current liabilities were $2,302,995. However, $650,000 of the liabilities is convertible into common stock.





Our sales cycle can be several months or longer, with some costs incurred upfront, making our business working-capital intensive. Also, because we build our products based upon a specific order, it can take up to 90 days to fulfill an order, followed by a period of time in which to collect our receivables. We do not have a credit line, and until we are profitable, commercial credit is unavailable for the Company. The Company does not anticipate a profitability level that would resolve its cash flow issues in the foreseeable future and expects to rely upon capital contributed by investors to fund its operations.





The Company outsources its manufacturing; consequently, we do not have significant capital expenditures, although tooling costs can reduce our product cost when justified by the level of sales.




We raised $2,593,087 from the sale of common stock to investors for the five months ended December 31, 2010.





Operating Activities





Net cash used in operating activities for the five months ended December 31, 2010 totaled $2,481,038. as compared to $2,574,009 for the five months ended December 31, 2009. This change resulted primarily from the greater level of commercial activity in 2010, which resulted in the much greater net loss for the five-month period ending December 31, 2009 offset by the larger noncash expenses in the same period as discussed above.





Investing Activities





Net cash used in investing for the five months ended December 31, 2010 was $7,988 as compared to $ 21,081 for the five months ended December 31, 2009. The amounts incurred in 2010 were due primarily to our purchase of tooling and software for product development.





Financing Activities





Our net cash raised in financing activities for the five months ended December 31, 2010 was $2,715,729, of which $2,593,087  resulted from sales of common stock and $122,642 resulted from the sale of notes. Our net cash from financing activities for the five months ended December 31, 2009 was $4,785,250 of which $500,000 resulted from the sale of debentures and $4,285,250 from the sale of common stock.





Year ended July 31, 2010 compared to Year ended July 31, 2009





The following table sets forth the relationship to total revenues of principal items contained in the statement of operations of the consolidated financial statements included herewith for the years ending July 31, 2010 and July 31, 2009.





2010


2009Sales

$
1,587,418


$
996,080Cost of Sales


1,785,467



677,724Selling, General & Administrative Expenses


7,783,761



8,380,170Research and Development Expenses


7,145,723



6,294,626Total Operating Costs and Expenses


14,929,484



14,674,796Operating Loss


(15,127,533
)


(14,356,440
)Impairment of Investment in EPIR


(3,680,385
)


- 0-Interest Income (expense)


(47,091
)


68,437Derivative Loss


1,663,539



183,358Net Loss

$
(20,518,548
)

$
(14,471,361
)






16








Revenues





Revenues for the fiscal year ended July 31, 2010 were $1,587,418, which represented an increase of approximately 59% from the prior year’s sales of $996,080. All of the Company’s sales originated from its LED lighting division, and all of the increase in revenue was a result of sales of LED lighting fixtures.





A number of initiatives were begun in 2010 or continued from the prior year that contributed to the increases in sales for the year, in particular:





1. In the year ending July 31, 2010, the Company completed its sale of Cobra Head lights to Camp Lejeune, a military base in North Carolina. Revenue from the sale was $483,111 or approximately 30.43% of total sales revenue for the year. The Company sold this project at a discounted price and determined to take a loss leader on this project in order to demonstrate the product with a view toward generating additional business from this particular base and from other military installations. The Company sought to build from this advantage and engaged a retired military officer to assist in its marketing efforts in the area.





2. The Company developed relationships with energy service contractors, an emerging business model of companies that sell expertise in energy savings over a life cycle. The Company’s LED lighting fixtures are designed to provide energy savings over a life cycle, making this an attractive area for future growth. During fiscal year 2010, the Company generated approximately $300,000 in sales from these relationships. This sector did not contribute to revenues in 2009.





3. The Company continued its relationship with Hubbell Lighting, a large OEM, through sales of light engines. Cost of sales, in this case, were favorable in 2010 as the significant engineering expense was incurred in fiscal year 2009. Sales from this relationship were $237,174, or approximately 14.94% of total sales for the year ended July 31, 2010, compared to $617,578 (62.00%) of sales for the year ended July 31, 2009. The decline in sales from 2009 was due to the loss of a large customer by Hubbell. Continued success in this area could result from growth with the existing customer and establishing similar relationships with other OEMs.





4. The Company actively bids on lighting projects for municipalities, a significant market segment for our LED lighting products. In fiscal year 2010, projects for municipalities resulted in sales of $224,000, which represented 14.11% of total sales for the year, as compared to $310,319 (31.13%) in 2009. This segment did not generate profit for the Company in 2010, due largely to highly competitive pricing and specialized requirements that increase our costs of sale.





5. The Company sold $165,000 of Infrared wafers under its agreement with i3 Systems in 2010; however, the cost of sales exceeded the revenue on this sale.





Gross Margin Profit





The Company had a gross margin loss of 12.48% for the year ended July 31, 2010, as compared to a gross margin profit of 31.96% for the year ended July 31, 2009.  A number of factors contributed to this circumstance, particularly:




·
The additional costs associated with developing, producing and delivering new products.·
Several of our distribution channels represent market sectors in which sales are driven almost entirely by low price and cost savings realized. Our products provide additional functionality not available in other products but they are consequently more expensive than other lighting products and therefore do not compare favorably in market sectors that are driven entirely or substantially by cost.·
In order to more effectively negotiate prices with suppliers, the Company needs higher sales volumes than it is currently experiencing.





Expenses





Overall expenses were substantially flat year to year from July 31, 2009 to July 31, 2010. However, the Company recognized an impairment to an investment of approximately $3.7 million and the derivative loss of approximately $1.7 million associated with the convertible debentures issued in 2010. See “Other Expenses”, below.





The major categories of expense for the Company are discussed individually below.





Research and Development





Research and development expenses are primarily associated with our solar and infrared technology efforts. The vast majority of R&D expenses of the Company have been paid to EPIR Technologies, Inc. to develop the solar and infrared technologies discussed elsewhere in this report. See “Item 1 Description of the Business – Company History -- Initial Entry into Solar and Infrared Technologies.” R&D expenses for year ended July 31, 2010 totaled $7,145,723, compared to $6,294,626 for the same period in 2009, or an increase of $851,097 (13.52%).






17





Over the course of the last fiscal year, the solar industry and its prospects changed significantly. Domestic policy began to move away from subsidies for clean and renewable energy as the U.S. economy continued to languish, and public support of clean energy programs waned. The bell-weather stock in the solar industry, First Solar, saw its stock drop 65%, in spite of excellent performance, as investors doubted future subsidies. It became increasingly clear that grid , which was necessary to realize value from our strategy in the Dominican Republic, probably could not be achieved within the timeframes necessary for our solar program to be self-funding. EPIR’s failure to complete the manufacturing facility required under their contract with us created another significant obstacle to successfully implementing our strategy in the Dominican Republic. Also, the deterioration of our relationship with EPIR negatively our infrared operations, which we believed would begin to fund solar research as we delivered infrared wafers under the i3 Systems contract.





Based on the current climate and the status of the litigation with EPIR, the Company does not anticipate expending significant funds on research and development in the solar or infrared technologies in the foreseeable future. The Company does anticipate continuing to develop its LED technology to support its LED lighting business, however, and expects to devote significant funds to development of the next generation of its LED products.








Selling, General and Administrative Expenses





These expenses decreased by $596,409 from July 31, 2009 to July 31, 2010 from $8,380,170 in 2009 to $7,783,761 in 2010. The major components are discussed below.





Product Development





Product development costs were $1,857,831 for the year ended July 31, 2010, compared to $1,316,722 for the year ending July 31, 2009, an increase of $541,109 or approximately 41%. The nature of the expenses changed over the 2010 fiscal year as the Company moved from creating original designs in 2009 to improving those designs and keeping pace with technological changes in 2010. We anticipate the need to invest in developing the next generation of our products in order to compete effectively in our markets.





General and Administrative





General and administrative expenses are the ordinary expenses of running the business, including overhead, managerial salaries and occupancy expense. For the year ending July 31, 2010 we spent $1,010,772 in this area, compared to $512,821 in the prior year. Among the factors reflected in this increase is the legal costs associated with the EPIR lawsuit, the expenditures the Company incurred related to Sarbanes Oxley evaluation and compliance, other administrative increases such as salaries for new positions added, and an additional amount paid to a consultant (both in cash and in stock) paid to provide technical and business advice to the senior management of the Company.





Sales and Marketing Costs





Sales and marketing costs, included noncash expenses, totaled $3,484,519 in fiscal year 2010, as compared to $4,499,054 in fiscal year 2009, representing a decrease of $1,014,535 or 22.54%. This decrease reflected decreases in the price of the Company’s common stock, as well as a decrease in the number of shares of the Company’s common stock issued, which was used to pay much of the sales and marketing expenses.





Sales and marketing salaries and benefits costs were $300,000 in 2010, as compared to $100,000 in 2009, reflecting the Company’s additions to its sales force. In addition, in 2010, the Company incurred $140,000 in commissions; $50,000 in marketing costs, including printing and setup fees, and $75,000 in royalties. The Company incurred royalty expense of $50,000 in 2009 but no significant marketing or commission expenses.





Other Income and Expenses





Other income and expense reflects interests costs (net of interest income), including derivatives and impairment costs, as discussed below:





Interest expense for the year ended July 31, 2010 was $47,091 compared to $68,437 of Interest income for the year ended July 31, 2009. This was due to the accumulation of cash from private placements; more cash on hand was maintained during the year ending July 31, 2009 as compared to the year ending July 31, 2010.





Derivative losses - We had interest expense and derivative expense of $183,358 on the sale of $500,000 of convertible debentures for the year ended July 31, 2009 compared to $1,663,539 for the year ended July 31, 2010, when we sold $1,500,000 of similar convertible debentures. The $500,000 of debentures sold at July 31, 2009, along with $500,000 of debentures sold on August, 2009 was settled for 30,992,493 shares on September 28, 2009. The $1,000,000 in debentures sold on July 30, 2010 was settled for 64,516,127 shares in September, 2010.








18





Impairments – The Company recognized a significant impairment to its investment in EPIR during 2010. In the first quarter of 2010, EPIR was required to deliver, under the RD&S Agreement, materials meeting specified efficiency and manufacturing requirements. The contract requirements were not met, and the Company was unable to determine whether the product would be delivered at any time and if delivered, whether it would meet the specifications of the contract.  Also, as discussed in Item 3, “Legal Proceedings”, the Company was unable this year to obtain financial and other data provided in previous years to evaluate its investment in EPIR Technologies, Inc.  Finally, the litigation brought by EPIR casts further doubt on the value of the investment to the Company.  For these reasons, the Company has reflected an impairment to that asset of $3,680,385.




Liquidity and Capital Resources





The Company’s cash flow from operations is insufficient to meet its current obligations. In fiscal year 2010, the Company relied upon additional investment through sales of common stock and debentures in order to fund its operations. The Company anticipates the need to raise significant amounts of capital in order to fund its operations in the next fiscal year.





Cash Flows and Working Capital





As a result of losses we have incurred to date, we have financed our operations primarily through equity and debentures. As of December 31, 2010, we had $1,285,575 in cash and cash equivalents. We had receivables, net of allowances, of $491,740 and inventory of $653,307 and our current liabilities were $2,302,995, although $650,000 of the liabilities are convertible into common stock.





Our business cycle is working capital intensive, in that the sales cycle can be several months or longer, with some costs incurred upfront. Also, because we build our products based upon a specific order, it can take up to 90 days to fulfill an order, followed by a period of time in which to collect our receivables. We do not have a credit line, and until we are profitable, credit is uncertain for the Company. The Company does not anticipate a profitability level that would resolve its cash flow issues in the foreseeable future and expects to rely upon capital contributed by investors to fund its operations.





The Company outsources its manufacturing; consequently, we do not have significant capital expenditures.





Operating Activities





Net cash used in operating activities for the year ended July 31, 2010 totaled $5,172,923 as compared to $7,357,846 for the year ending July 31, 2009. Net cash used by operating activities was mainly a result of a net loss of $(20,518,548) for the year ending July 31, 2010 which included non-cash charges of approximately $15,000,000.





Investing Activities





Net cash used in investing for the year ending July 31, 2010 was $358,386 as compared to $ 32,941 for the year ending July 31, 2009. The amounts incurred in 2010 were due primarily to our purchase of tooling and software for product development.





Financing Activities





Our net cash raised in financing activities for the year ending July 31, 2010 was $6,281,686, of which $4,075,250 resulted from sales of common stock and $2,206,326 resulted from the sale of notes and convertible debentures. Net cash raised in financing activities was $1,716,503 for the year ending July 31, 2009, of which $1,216,503 was attributable to private placements of common stock and $500,000 was attributable to convertible debentures.








Cash Requirements





As of April 13, 2011, we had $335,194 in cash and cash equivalents. As discussed below, this amount and our current accounts receivable collections may be adequate to maintain the Company’s current level of operations through May 31, 2011, after which we would need additional capital or face a significant curtailment of operations.









19




Commitments





The scheduled contributions under the EPIR contract which remain unfunded are listed in the following table: (see discussion below)





1,000,000
June 1, 20101,000,000
August 1, 20101,000,000
October 1, 20101,000,000
December 1, 2010500,000
April 1, 2011500,000
October 1, 2011500,000
April 1, 2012500,000
October 1, 2012500,000
April 1, 2013500,000
October 1, 2013500,000
April 1, 2014500,000
October 1, 2014500,000
April 1, 2015500,000
October 1, 2015500,000
April 1, 2016500,000
October 1, 2016500,000
April 1, 2017500,000
October 1, 2017500,000
March 1, 1017500,000
October 1, 2017








It is unclear whether the Company will be required to fund any portion of these commitments in the future and it is unlikely that the issue will be resolved except through a settlement of the litigation or an order of the court.





Assessment of Company Strategies; Change in Management





In September, 2010, the Company hired Arthur Buckland as its Chief Executive Officer. Mr. Buckland has a wealth of general management experience in the energy and semiconductor sectors, having served as a senior executive in numerous companies in those industries. Mr. Buckland replaced Carl Smith as Chief Executive Officer, though Mr. Smith remained Chairman of the Board until his resignation from the Board in January 2011. As part of the transition, and as an ongoing process, the management team continues to review the Company’s processes and strategies and determine the most appropriate course going forward.





LED Lighting





The Company’s intends to devote its financial resources to its LED lighting business, as it presents the most promising avenue to growth and profitability in the shortest period of time with the least amount of capital required.  We will continue to monitor developments in the solar and infrared industries to determine at what point, if any,  pursuit of those technologies may be more viable.





Solar





Given the lack of performance by EPIR, the price collapse in combination with gains in efficiency and over-supply in the solar industry in general, the Company does not believe that aggressively pursuing a solar strategy is appropriate. In addition, the financial markets have devalued solar companies significantly, and economic viability of the technology remains at best a number of years in the future.





We are also reviewing our planned facility in the Dominican Republic. It is unclear at this time whether this project could be successfully completed as a solar facility without engaging additional partners on different terms than those that were contemplated at the outset.





Infrared





Management is assessing its options with regard to its contract with i3 Systems. At the current time, we have no further orders under the contract and it is unclear whether the product would be supplied by EPIR if orders were forthcoming. The Company is considering its alternatives in this regard but has reached no definitive conclusion.





Going Concern





The Company has suffered recurring losses from operations and is dependent on additional capital to execute its business plan.




With our present cash and cash equivalents management expects to be able to continue some of our operations for at least the next twelve months. However, we have suffered losses from operations. The continuation of our company is dependent upon attaining and maintaining profitable operations and raising additional capital as needed. In this regard we have raised additional capital through the equity offerings noted above. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. We may seek to sell additional equity securities, debt securities or borrow from lending institutions. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The issuance of additional equity securities, including convertible debt securities, by us could result in a significant dilution in the equity interests of our current stockholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer. In such event, we will be forced to scale down or perhaps even cease our operations.





We have undertaken steps as part of a plan to improve operating results with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) increasing our revenues and gross profits; and (c) reducing expenses.








20





There can be no assurance that we will successfully accomplish these steps and it is uncertain whether we will achieve a profitable level of operations and/or obtain additional financing. There can be no assurance that any additional financings will be available to us on satisfactory terms and conditions, if at all. In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.





These consolidated financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.





Recent Accounting Pronouncements





The Financial Accounting Standards Board (FASB) ratified Accounting Statement Update (ASU) 2009-13 (ASU 2009-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” which eliminates the residual method of allocation, and instead requires companies to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists and otherwise using third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, companies shall use their best estimate of the selling price for that deliverable when applying the relative selling price method. ASU 2009-13 shall be effective in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Companies may elect to adopt this guidance prospectively for all revenue arrangements entered into or materially modified after the date of adoption, or retrospectively for all periods presented. The Company will adopt this standard effective January 1, 2011.  The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.





In April 2010, the FASB issued Accounting Standards Update 2010-17 (ASU 2010-17), "Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition." The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.





Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.





Critical Accounting Policies and Estimates





Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified our critical accounting estimates which are discussed below.





Use of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.





Accounts Receivable





Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to bad debt expense and a credit to an allowance for uncollectible accounts based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for uncollectible accounts and a credit to accounts receivable.





Accounting for Derivative Instruments





Derivatives are required to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in the Company’s structured borrowings, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.








21





Research and Development





Research and Development ("R&D") expenses are charged to expense when incurred. The Company has consulting arrangements which are typically based upon a fee paid monthly or quarterly. Samples are purchased that are used in testing, and are expensed when purchased. R&D costs also include salaries and related personnel expenses, direct materials, laboratory supplies, equipment expenses and administrative expenses that are allocated to R&D based upon personnel costs.





Revenue Recognition





The Company recognizes revenue when the following conditions have been met: there is persuasive evidence an arrangement exists which includes a fixed price; there is reasonable assurance of collection; the services or products have been provided and delivered to the customer; no additional performance is required; and title and risk of loss has passed to the customer. Products may be placed on consignment to a limited number of resellers. Revenue for these consignment transactions will also be recognized as noted above.





Share-Based Payments





Compensation cost relating to share-based payment transactions are recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).





Liquidity - Going Concern





The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the five months period ended December 31, 2010 and 2009 the Company has experienced losses of $3,898,336 and $8,352,200, respectively. As of December 31, 2010, the Company also had a working capital surplus of $202,086, which is not adequate to sustain continued losses. To date the Company has funded operations through capital infusions from investors through the sale of its common stock and certain debt instruments, particularly convertible debentures. The Company anticipates a need for significant funding from capital investment in order to support its operations and continuing as a going concern. The ability of the Company to continue its operations as a going concern is dependent on continuing to raise sufficient new capital to fund its business and development activities and to fund ongoing losses, if needed, and ultimately on generating profitable operations.





The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.





Off-Balance Sheet Arrangements





We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.





Our EPIR contract may require us to utilize working capital to make payments under the contract in the future; however, this would only arise if EPIR is successful in the litigation. At this time we cannot predict whether that may happen and if it did, what effect it would have on the Company.





Except as discussed below, our company has not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under which we have:





· An obligation under a guarantee contract, although we do have obligations under certain sales arrangements including purchase obligations to vendors,


· A retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets,


· Any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument or,


· Any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.





Quantitative and Qualitative Disclosures About Market Risk





We have no material exposure to interest rate changes. We are subject to changes in the prices of energy, which are out of our control.





Effect of Changes in Prices.





Changes in prices in the past few years have been a significant factor in the solar and lighting industries. In the solar industry particularly, in 2009 and 2010 the PV solar market flattened and new Chinese factories brought a 20-fold increase in capacity on line. As a result, the price of silicon-based PV solar panels collapsed by 80% to 90% which eliminated much of the opportunity for profit in the product. In addition, because the Company was focusing on a different, less efficient but lower-cost technology (cadmium telluride), the dramatic decrease in silicon panel prices eliminated the advantage the Company was seeking to gain. At the same time the capital market valuations of all solar companies have been devalued to reflect the commoditization of the solar market world-wide. The Company believes it will be several years before conditions in the solar market might be favorable again.






22





In the lighting industry, prices of equivalent incandescent lighting products are lower than the Company’s prices. Though our sales are currently buoyed by subsidies, reducing the cost of our products is a primary long-term strategy and will be necessary in order for our LED lighting products to be competitive in the marketplace in the future.








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





Previous independent registered public accounting firm





On July 28, 2010 (the “Dismissal Date”), the Company advised Bobbit, Pittenger & Company, P.A.  (the “Former Auditor”) that it was dismissed as the Company’s independent registered public accounting firm.  The decision to dismiss the Former Auditor as the Company’s independent registered public accounting firm was approved by the Company’s Board of Directors on July 28, 2010.  Except as noted in the paragraph immediately below, the reports of the Former Auditor on the Company’s consolidated financial statements for the years ended July 31, 2009 and 2008 did not contain an adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principle.





The reports of the Former Auditor on the Company’s consolidated financial statements as of and for the years ended July 31, 2009 and 2008 contained an explanatory paragraph which noted that there was substantial doubt as to the Company’s ability to continue as a going concern as the Company had a loss from continuing operations and a working capital deficiency.





During the years ended July 31, 2009 and 2008, and through the Dismissal Date, the Company has not had any disagreements with the Former Auditor on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the Former Auditor’s satisfaction, would have caused them to make reference thereto in their reports on the Company’s consolidated financial statements for such years.





During the years ended July 31, 2009 and 2008, and through the Dismissal Date, there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.





New independent registered public accounting firm





On August 2, 2010 (the “Engagement Date”), the Company engaged Kingery & Crouse, P.A.  (“New Auditor”) as its independent registered public accounting firm for the Company’s fiscal year ended July 31, 2010. The decision to engage the New Auditor as the Company’s independent registered public accounting firm was approved by the Company’s Board of Directors.





Except as set forth below, during the two most recent fiscal years and through the Engagement Date, the Company has not consulted with the New Auditor regarding either:





●
application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company nor oral advice was provided that the New Auditor concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or





●
any matter that was either the subject of a disagreement (as defined in Regulation S-K, Item 304(a)(1)(iv) and the related instructions) or reportable event (as defined in Regulation S-K, Item 304(a)(1)(v)).





During the previous fiscal year, the Company has consulted with the New Auditor with respect to the valuation of the Company’s derivative securities.





ITEM 9A - CONTROLS AND PROCEDURES





Under the supervision and with the participation of management, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this by this Report for the five months ended December 31, 2010. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were not effective,  because certain deficiencies in internal controls constituted material weaknesses as discussed below. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company's financial statements for the current reporting period.







23






Management Report on Internal Control over Financial Reporting





The financial statements, financial analyses and all other information included in this Report were prepared by the Company's management, which is responsible for establishing and maintaining adequate internal control over financial reporting.





The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:





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




·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition and use or disposition of the Company's assets that could have a material effect on the Company's financial statements.





There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls.  Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation.  Furthermore, due to changes in conditions, the effectiveness of internal controls may vary over time.





Our Company, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework  (1992) andInternal Control Over Financial Reporting – Guidance for Smaller Public Companies  (2006), issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, the Company's management concluded that there are certain material weaknesses in our internal control over financial reporting as of December 31, 2010.  A material weakness 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 the Company's annual or interim financial statements will not be prevented or detected on a timely basis.





The material weaknesses identified are as follows:





We lack segregation of duties in the period-end financial reporting process.  The Company has historically had limited accounting staff and minimal operating revenue and, as such, all accounting and financial reporting operations have been and are currently performed by one individual.  The party that performs the accounting and financial reporting operations is the only individual with any significant knowledge of generally accepted accounting principles.  The person is also in charge of the general ledger (including the preparation of routine and non-routine journal entries and journal entries involving accounting estimates), the preparation of accounting reconciliations, the selection of accounting principles, and the preparation of interim and annual financial statements (including report combinations, consolidation entries and footnote disclosures) in accordance with generally accepted accounting principles.  In addition, the lack of additional staff with significant knowledge of generally accepted accounting principles has resulted in ineffective oversight and monitoring.





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





Changes in Internal Control over Financial Reporting





There has been no change in the Company’s internal control over financial reporting during fiscal year 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.





ITEM 9B. OTHER INFORMATION





None.





PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS





The following are the names and certain other information regarding or current directors and executive officers.





Name

Age

PositionArthur Buckland

62

Director, Acting Chairman of the Board, Chief Executive OfficerErich Hofer

51

DirectorMatthew Veal

52

Chief Financial Officer, Treasurer and Assistant SecretaryRobert A. Fugerer

52

Chief Technology OfficerThomas A. Siegfried

59

Director









24




Pursuant to our Bylaws, directors are elected at the Annual Meeting of Stockholders, and each director holds office until his or her successor is elected and qualified. Officers are elected by the Board of Directors and hold office until an officer’s successor has been duly appointed and qualified unless an officer dies, resigns or is removed by the Board prior to that time. There are no family relationships among any of our directors and executive officers.





Background of Directors and Executive Officers








Arthur Buckland is Chief Executive Officer and Acting Chairman of the Board of the Company. Mr. Buckland has more than twenty years of experience as an executive officer of companies, primarily in the electronics industry, and director on various boards of publicly-traded companies.  Mr. Buckland is the co-founder of the Los Angeles, CA based company Angeles Energy.  From 2007 to 2009 Mr. Buckland was Chairman, Chief Executive Officer and President at Soliant Energy Inc.  Mr. Buckland was also co-founder, Chairman, and Chief Executive Officer of Massachusetts-based Engim Inc from 2001 – 2003.  In 1996, Mr. Buckland was named Entrepreneur of the Year by NASDAQ, Ernst & Young, and USA Today for his entrepreneurial efforts with Clare Inc. from 1993 to 2001.  Mr. Buckland holds a Masters in Business Administration from Harvard Business School and a Bachelors of Science in Electrical Engineering from Syracuse University.





Robert Fugereris the Company’s Chief Technology Officer and served on our Board of Directors April 2006 until January 2011.  Prior to 2006 Mr. Fugerer served as principal engineer for electro-optical and signal processing technologies at the Arnold Engineering and Development Center in Tullahoma Tennessee and then Senior Applications Engineer for Arrow Electronics in Tampa Florida. Mr. Fugerer has a Bachelor degree in Engineering Science from Lipscomb University and Bachelor degree in Electrical Engineering from Vanderbilt University where he graduated Summa Cum Laude. Mr. Fugerer also has a Master of Science in Electrical Engineering from the University of Tennessee and Master of Science in Engineering Management from the University of Alabama.





Erich Hofer has been a director of PetroHunter Energy Corporation, a public company, since April 28, 2009. He has been a director of Arkanova Energy Corporation since March 2007. Arkanova Energy is a publicly-traded oil and gas company with property interests located in Arkansas, Colorado and Montana. From January 2005 to September 2007, he served as group CFO for Argo-Hytos Ltd., a mobile hydraulic application manufacturer, headquartered in Baar, Switzerland. From September 2001 to March 2004, he served as chief of staff and deputy of the group CEO at Schneeberger Ltd., a linear technology manufacturer, located in Roggwil, Switzerland. Mr. Hofer holds an MBA degree from the University of Chicago and a B.S. degree in economics and management from the University for Applied Science for Business and Administration in Zurich. He is also a certified management accountant in Switzerland.





Thomas A. Siegfried is a former construction executive with 25 years experience in the commercial and government sector, most recently as co-owner of Centennial Contractors Enterprises Inc. of Reston, Va., a nationally renowned construction company that manages large facilities and infrastructure at universities, municipalities and federal installations.





Matthew Veal has been our Chief Financial Officer and Treasurer since the inception of the Company and served as its secretary from inception to November, 2010. From 2004 until 2010, served on the board and is the former CFO (2004 to 2006) for Global Water Technologies, Inc. Mr. Veal graduated from the Fisher School of Accounting at the University of Florida in 1980.





Role of the Board





Pursuant to Nevada law, our business, property and affairs are managed under the direction of our board of directors. The board is responsible for establishing broad corporate policies and for the overall performance and direction of the Company, but is not involved in day-to-day operations. Members of the board keep informed of our business by participating in board and committee meetings, by reviewing analyses and reports sent to them regularly, and through discussions with our executive officers.





2010 Board Meetings





During the five months ended December 31, 2010, the Board formally met twice and adopted 11 additional written resolutions. All of the directors attended all of the combined total meetings of the Board on which they served in 2010.





Board Committees





Audit Committee





We do not have a separate Audit Committee; rather, our board of directors performed the functions of an Audit Committee during 2010. These functions include recommending a firm of independent certified public accountants to audit the annual financial statements; reviewing the auditors’ independence, the financial statements and their audit report; and reviewing management's administration of the system of internal accounting controls. We do not currently have a written audit committee charter or similar document.








25





Nominating Committee





We do not have a Nominating Committee or Nominating Committee Charter. Our board of directors performs the functions associated with a Nominating Committee.





Compensation Committee





We currently do not have a Compensation Committee of the board of directors. Our board of directors performs the functions of the Compensation Committee, including reviewing compensation and incentives our executive officers, directors, consultants and employees.





FAMILY RELATIONSHIPS





There are no family relationships between any of our directors or executive officers.





INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS





Other than as discussed herein, none of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:





1. any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;





2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);





3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or





4. being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.





Code of Conduct





We have adopted a written code of conduct that governs all of our officers, directors, employees and contractors. The code of conduct relates to written standards that are reasonably designed to deter wrongdoing and to promote:


·
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
 
 ·
Full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with, or submitted to, the Commission and in other public communications made by an issuer;
 
 ·
Compliance with applicable governmental laws, rules and regulations;
 
 ·
The prompt internal reporting of violations of the code to an appropriate person or persons indentified in the code; and
 
 ·
Accountability for adherence to the code.


SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE





Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s Directors and executive officers, and persons who own more than 10 percent of the Company’s common stock, to file with the SEC the initial reports of ownership and reports of changes in ownership of common stock. Officers, Directors and greater than 10 percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.





Specific due dates for such reports have been established by the SEC, and the Company is required to disclose in this report any failure to file reports by such dates during fiscal 2009. Based solely on its review of the copies of such reports received by it, or written representations from certain reporting persons that no Forms 5 were required for such persons, the Company believes that during the fiscal five months ended December 31, 2010, there was no failure to comply with Section 16(a) filing requirements applicable to its executive officers, directors or ten percent stockholders.









26




Director Compensation





The Company compensates outside directors on a negotiated basis including expenses for their service. Directors who are executive officers do not receive separate compensation for their service on the board of directors.





Limitation of Liability of Directors





Our Articles of Incorporation, as amended, provide to the fullest extent permitted by Nevada law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended, is to limit the rights of the Company and its shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.





Election of Directors and Officers





Directors are elected to serve until the next Annual Meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.





No Executive Officer or Director has been the subject of any order, judgment, or decree of any Court of competent jurisdiction, or any regulatory agency permanently or temporarily enjoining, barring suspending or otherwise limiting him from acting as an investment advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any securities.





No Executive Officer or Director has been convicted in any criminal proceeding (excluding traffic violations) or is the subject of a criminal proceeding which is currently pending.





No Executive Officer or Director is the subject of any pending legal proceedings.





Compensation Discussion and Analysis





Currently, the Company’s philosophy is to align compensation with its short-term goals (development of products, sales, and generating positive cash flow) as well as the long-term goal of providing expertise to develop long-term product development and development of markets for the Company to pursue. Our plan was determined by a combination of upper management, finance and operations departments, based on research available from NCEO (the National Center for Employee Ownership) and other research management is familiar with. The current plan has the flexibility to be changed as the needs of the Company and the circumstances surrounding it change. The Company has designed its compensation structure to provide its core employees with fair but slightly below-market compensation and supplement that compensation with equity compensation that statistics demonstrate a result of both an increase in productivity and stock price increases over companies that do not provide equity compensation. We have provided compensation in stock and options to ensure that all of our employees and consultants are rewarded if and when our shareholders are rewarded; this is the fundamental basis of our plan. We feel this is appropriate due to the fact we are in the development stage. Certain consultants have elected to be paid in shares only.





We do not work from any specified formula in setting compensation. We changed from predominately stock grants to predominately stock options as opposed to other forms of equity ownership due to simplicity, particularly in the tax area. Individual awards were based on the importance of the type of work performed to the Company’s overall goals. In sales, we have provided for sales performance bonus in equity compensation (as well as sales commissions), but all other awards were based on time of service, which we find to be consistent with relevant survey data for comparable companies. We did not use a separate plan based on type of employee (management vs. non-management employee) as we are small and wished to limit the distinctions among personnel. We have a general goal of having 15% percent of the ownership of the Company in the hands of our employees. We do not find this to be excessive in comparison with other companies that have employee ownership plans, based on the survey data we have reviewed. We have awarded options with terms of 3 to 5 years to provide longer-term horizons for those who have received options, but other than vesting based on service years we do not have any long-term conditions in our compensation structure.





We match to our 401(k) up to a specified level, which is the same for all employees. This is the only form of retirement plan we offer.  We pay a portion of health insurance for our employees.





Historically, we entered into employment agreements with most of our employees. During the five months ended December 31, 2010, we began to move away from written employment agreements for employees other than the CEO, mutually agreeing to terminations of agreements with two of our executive officers and allowing other agreements to expire without renewing them. However, all of these employees remain employed by the Company.






27







We believe that the members of our board of directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not yet cost effective for the Company.





ITEM 11. EXECUTIVE COMPENSATION





The following table sets forth information concerning the total compensation that we have paid or that has accrued on behalf of our chief executive officer and our other executive officers during the fiscal year ended December 31, 2010 and the comparable period in 2009.


Name and

principal

position
Year

Salary

($)

Bonus

($)

Stock

Awards

($)


Option Awards

($)


Non-Equity Incentive Plan

Compensation

($)

Nonqualified Deferred

Compensation Earnings

($)

All Other

Compensation

($)

Total

($)Art Buckland
2010

$
76,697



0


$3,137,971(1
)

0

0

0
(2)

$
3,214,668CEO
2009


0

0

0


0


0

0

0



0Carl Smith
2010

$
220,000
(3)


-0-



-0-



-0-

-0-

$
21,869
(4)

$
241,869Former CEO
2009

$
-0-




-0-



-0-



-0-

-0-

$
20,988
(5)

$
20,988Robert Fugerer
2010

$
150,000




-0-



-0-



-0-

-0-

$
19,891
(6)

$
169,891CTO
2009


150,000




-0-



-0-



-0-

-0-

$
19,977
(7)

$
169,977Matthew Veal
2010

$
100,000




-0-



-0-



-0-

-0-

$
-0-
(8)

$
113,470CFO
2009


100,000




-0-



-0-



-0-

-0-

$
-0-


$
110,298





(1)
Under the terms of his employment agreement, Mr. Buckland was granted an option to purchase 72,000,000 shares of common stock at an exercise price of $.045 (which was the closing price of the Company’s stock on September 17, 2010. This option is exercisable as to 25% of the shares on September 17, 2011. The remainder of the shares subject to the option vest ratably on a monthly basis thereafter. The amount shown is the Black-Scholes valuation of this option, assuming a volatility rate of 130%, a risk-free interest rate of 3%, -0- dividend rate and a term of 5 years.


(2)
Mr. Buckland’s other compensation for 2010 did not exceed $10,000. However he is entitled to the same 401(k) match, health insurance benefits and cellular phone reimbursement as other executives. In addition, the Company reimbursed certain moving expenses of Mr. Buckland during 2010.


(3)
Mr. Smith received 2,000,000 shares of common stock of the Company in lieu of a salary in 2010. Mr Smith resigned as CEO in September, 2010 and resigned from the Board of Directors in January, 2011. Mr. Smith is no longer an employee of the Company.


(4)
Includes $19,975 in health insurance premiums paid by the Company and $1,894 for a cellular phone paid by the Company.


(5)
Includes $18,708 in health insurance premiums paid by the Company and $2,280 for a cellular phone paid by the Company.


(6)
Includes $12,074 in health insurance premiums paid by the Company, $1,817 for a cellular phone paid by the Company and a matching contribution by the Company to the 401(k) plan of $6,000 .


(7)
Includes $11,895 in health insurance premiums paid by the Company, $1,882 for a cellular phone paid by the Company and a matching contribution by the Company to the 401(k) plan of $6,000 .


(8)
Mr. Veal’s other compensation for 2010 did not exceed $10,000. However, he is entitled to the 401(k) match, health insurance premium contribution and cellular phone reimbursement as other executives.





Below is information concerning unexercised options; stock that has not vested; and equity incentive plan awards for each named executive officer outstanding as of the end of the registrant's last completed fiscal year:









28







OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDOPTION AWARDS

STOCK AWARDSName

Number of Securities Underlying Unexercised Options

(#)

Exercisable


Number of Securities Underlying Unexercised Options

(#)

Unexercisable


Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options

(#)


Option Exercise Price

($)

Option Expiration Date

Number of Shares or Units of Stock That Have Not Vested

(#)


Market Value of Shares or Units of Stock That Have Not Vested

($)


Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested

(#)


Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested

(#)CEO

Art Buckland


-0-



72,000,0000



-0-


$
0.045

9/17/2015


-0-



-0-



-0-



-0-Former

CEO

Carl Smith7


-0-



-0-



-0-



-0-

n/a


-0-



-0-



-0-



-0-CFO

Matthew Veal


-0-



488,060



488,060


$
0.62

5/1/2013


-0-



-0-



-0-



-0-Former

President

Robert Fugerer


-0-



-0-



-0-



-0-

n/a


-0-



-0-



-0-



-0-








Below is the information concerning each exercise of stock options, SARs and similar instruments, and each vesting of stock, including restricted stock, restricted stock units and similar instruments, during the last completed fiscal year for each of the named executive officers on an aggregated basis:





OPTION EXERCISES AND STOCK VESTEDOPTION AWARDS


STOCK AWARDSName

Number of Shares

Acquired on Exercise

(#)


Value Realized on Exercise

($)


Number of Shares Acquired

on Vesting

(#)


Value

Realized

on

Vesting

($)CEO Art Buckland


-0-



-0-



-0-



-0-Former CEO Carl Smith


-0-



-0-



-0-


$
-0-CFO Matthew Veal


-0-



-0-



-0-



-0-Chief Technology Officer Robert  Fugerer


-0-



-0-



-0-



-0-








Long-Term Incentive Plans





Other than the Company’s 401(k) plan which is available to all employees, prior to May 1, 2008, there were no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers, except that our employees, directors and executive officers did receive stock options and stock grants at the discretion of our board of directors.





On May 1, 2008, the Company adopted the 2008 Incentive Stock Plan (“the Plan”) designed to retain directors, employees, executives and consultants and reward them for making major contributions to the success of the Company. The Plan was approved by the Company’s shareholders in November, 2010. A copy of the Plan has been filed by the Company as an exhibit to a prior report and is available through several sources, including the website of the Securities and Exchange Commission. The following is a summary of the Plan and does not purport to be complete:









29




The Plan is administered by the board of directors. The Plan did not have any individual caps other than the limitations on granting incentive stock options to employees, which limits are imposed by the rules relating to incentive stock options rather than the plan itself.The Plan permits the grant of restricted stock and nonstatutory options to participants. The maximum number of shares subject to the Plan was 30,000,000 when it was adopted; this amount was increased to 125,000,000 when the Plan was approved by the shareholders in November, 2010. The Plan will terminate ten years from the date it was adopted. The board of directors may, as permitted by law, modify the terms of any grants under the Plan, and amend, suspend, or extend the Plan itself.





On termination of employment, unvested options expire and do not continue to vest. Vested options are exercisable by employees on termination as follows:




·
Voluntary termination by the employee: within 3 months after termination of employment.
  ·
Termination by the Company for cause: options expire on termination
  ·
Disability:  vested options may be exercised within six months after termination.
  ·
Death: vested options may be exercised for one year after death.
  ·
Retirement permits exercise in accordance with the terms of the option.


Options cannot be transferred without the consent of the board of directors. Individual grants are made by the board.





We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock compensation may be granted at the discretion of our board of directors.





We have no plans or arrangements in respect of remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds $60,000 per executive officer. Mr. Smith, the former CEO and Chairman of the Company, was party to a Change of Control Severance Agreement dated as of December 21, 2005; however, this agreement was terminated by mutual consent of the parties during the late 2010.





As of February 2, 2011, the Registrant and Craca Properties, LLC have terminated the Option Agreement dated as of December 20, 2005, filed as Exhibit 10.3 to the Registrant’s 10-QSB dated December 7, 2007, as subsequently modified and assigned. That  option agreement related to 500,000,000 shares of common stock of the Registrant with an exercise price of $.10 per share.








EMPLOYMENT CONTRACTS AND CONSULTING AGREEMENTS





The Company has various employment and consulting contracts with its executives and consultants, described more fully below:





On August 30, 2010, the Board of Directors approved the appointment of Arthur Buckland as Chief Executive Officer and director of the Company effective September 7, 2010.





As per the terms of the Employment Agreement by and between the Company and Mr. Buckland that the parties executed on August 27, 2010 and effective September 7, 2010, Mr. Buckland’s term of employment with the Company will be at will.  Either Mr. Buckland or the Company may terminate the employment relationship at any time without notice or cause.  In consideration for Mr. Buckland’s services as CEO and director, the Company shall compensate Mr. Buckland an annual base salary of $300,000.  Mr. Buckland’s Base Salary will be subject to modification in accordance with the Company’s practices, policies, and procedures but will not be reduced without Mr. Buckland’s consent.





In addition, Mr. Buckland will be eligible to earn (A) an annual target bonus of up to fifty percent (50%) of his Base Salary measured as of the end of the preceding fiscal year, payable in cash when other Company executives are paid their bonuses, and (B) a stock bonus up to an additional two percent (2%) of the Company’s fully-diluted issued and outstanding.  The calculation of the number of shares issued and outstanding will be based on the actual outstanding shares on a fully diluted basis and will not include the option held by Craca LLC.  Bonus plan objectives shall be determined by the Board and Mr. Buckland by December 7, 2010 plus extensions and then established annually thereafter.  Any bonus for fiscal 2010 will be prorated for the partial year.  The Company reserves the right to recognize and reward special contributions Mr. Buckland may make to the Company.  The Company may, from time to time and at any time, pay, or cause to be paid, to Mr. Buckland such bonus compensation, if any, as the Board may, in its sole and absolute discretion, determine to be appropriate.





Pursuant to the terms of his employment agreement, the Company is obligated to grant Mr. Buckland an option to purchase seventy-two million (72,000,000) shares of the Company’s stock on September 17, 2010.  The exercise price for this option is $.0.045 (the closing price of the stock on the date of grant).  Mr. Buckland’s options are subject to Company’s standard four-year vesting provisions:  twenty-five percent (25%) to vest after the first twelve (12) months of continuous service with the Company, with monthly ratable vesting thereafter for the remaining shares.








30





During fiscal year 2010, Carl L. Smith, III served as Chief Executive Officer (through September 7, 2010) pursuant to an employment agreement dated November, 2009. Under this Agreement, Mr. Smith was entitled to compensation 2,000,000 shares of restricted common stock of the Company per year. Mr. Smith resigned as Chief Executive Officer on September 7, 2010, upon the hiring of Mr. Buckland (See Note R).





The Company entered into a change of control severance agreement with Mr. Smith on December 21, 2005 which was terminated in early 2011.





During fiscal year 2010, Craig Hall, a business advisor and co-founder of the Company, served as a consultant to the Company pursuant to an agreement with the Company dated November, 2009. Under that agreement, Mr. Hall was entitled to compensation of 2,000,000 shares of restricted common stock of the Company.  In December, 2010, Mr. Hall became National Account Manager for the Company, and his prior employment agreement was terminated.





Robert Fugerer, Chief Technology Officer of the Company, served pursuant to an employment agreement dated December 2010, which provides for an annual salary of $150,000 plus benefits on the same terms as available to other employees.  The agreement also entitled Mr. Fugerer to certain severance benefits in the event his employment is terminated by the Company. In March of 2011, the Company and Mr. Fugerer mutually agreed to cancel Mr. Fugerer’s employment agreement. Mr. Fugerer remains employed by the Company as its Chief Technology Officer.





Matthew Veal, the Company’s Chief Financial Officer, served pursuant to an employment agreement dated May 2008, which was modified in August 2010. The agreement provided for an annual salary of $100,000 per year and stock options to purchase 488,060 shares of common stock at $0.62 per share. In August, 2010, Mr. Veal’s agreement was modified to include an option to purchase up to 1% of the Company’s common stock at $.10 per share in the event his employment is terminated by the Company. The Company and Mr. Veal have mutually agreed to cancel Mr. Veal’s employment agreement dated July 1, 2010. Mr. Veal remains employed by the Company as its Chief Financial Officer.





Effective May 1, 2008, the Company modified employment agreements with several of its employees. Under the agreements, options to acquire an aggregate of 4,880,600 shares of common stock were granted to ten employees including the Chief Financial Officer. Most of those agreements were modified in April, 2010, and employees were granted 5,450,000 options at an exercise price of $.0001.





On March 17, 2008, the Company entered into an amended and restated consulting agreement with Fernando Cuza, who provides services related to the introduction of the Company to nationally recognized entities for product distribution opportunities, introduction to potential sales leads and acting as a liaison to various corporations.  The term of the agreement was effective through May 2009. As compensation for providing such services, the Company issued (i) an option to purchase an aggregate of 25,000,000 shares of common stock of the Company at an exercise price of $0.005 on a cashless basis for a term of seven years and (ii) an option to purchase an aggregate of 5,000,000 shares of common stock of the Company at an exercise price of $0.005 on a cashless basis for a term of seven years, which were issued in January 2009.





In August 2010, the Company entered into a three-year agreement with Kenneth Juster, a strategic business advisor.  Mr. Juster scrutinizes Company products and opportunities, and makes recommendations for realizing value and furthering efficiencies within the Company, particularly in the legal area.   Under the agreement, Mr. Juster received 1,000,000 shares of restricted stock of the Company and an option to purchase 3,000,000 shares at an exercise price of $0.042. The term of this option expires on August 5, 2015.





In March, 2010, Dr. Sivananthan terminated the agreement with the Company pursuant to which he had served as a scientific advisor to the Company.





In June, 2008, the Company entered into an agreement with Kauffman Consulting, Inc. to serve as the Company’s principal engineering consultant for strategic product development and marketing support efforts. In consideration for services rendered, the Company paid the consultant on an hourly basis. In addition, the Company granted to the consultant an option to purchase up to 3,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share.  A total of 1,000,000 and 1,000,000 options vested during the years ended December 31, 2010 and 2009, and the remaining shares vest on December 31, 2011. The Company terminated this agreement in October, 2010 and is currently negotiating a revised agreement with Kauffman Consulting. The options remain outstanding and are exercisable until June 6, 2013.





In 2008, Mr. Smith and Mr. Fugerer each agreed to cancel 4,495,000 shares of their common stock each to offset the dilution to the Company’s common stock caused by an issuance of shares to EPIR employees. Mr. Fugerer canceled 4,495,000 shares of his common stock in 2009. Mr. Smith surrendered 3, 238,333 shares of his common stock in late 2010, and the Company agreed that no further shares need be surrendered by Mr. Smith to satisfy this commitment.





On June 16, 2010, the Company entered into an agreement with Erich Hofer to which he agreed to serve as a director of the Company for a term of three (3) years.  In consideration of the services to be rendered by him as a director, the Company agreed to pay Mr. Hofer a fee of $2,000 per month and issue him 200,000 shares of common stock of the Company per year.





On June 16, 2010, the Company entered into a Cooperation Agreement with Mr. Hofer for a term of one (1) year, pursuant to which he is to introduce the Company to organizations, companies and/or individuals which he has vetted (the “Services”) for the purpose of transacting business.  As consideration for the Services, upon closing of a transaction resulting from the Services, the Company agreed to pay him a fee of 7.0% of the determined value of said transaction, 80% of which will payable in shares of common stock valued at the ten day trailing average closing bid price on the day of such closing and 20% of which will be paid in cash.









31




Additionally, on June 16, 2010, the Company entered into a Strategic Sales and Marketing Agreement with Mr. Hofer, for a term of one (1) year, whereby the Company appointed him as its sales representative to undertake selling the Company’s solid state lighting fixtures and renewable energy products to customers (the “Sales”).  In consideration for the Sales, the Company agreed to pay him up to a 10% sales commission.








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





Beneficial Ownership of Sunovia Common Stock of Principal Stockholders, Directors and Management








The following table sets forth information with respect to the beneficial ownership of the Common Stock as of April 1, 2010 by (i) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock; (ii) each director of the Company; (iii) each officer of the Company and (iv) all executive officers and directors as a group. Except as otherwise indicated below, each of the entities or persons named in the table has sole voting and investment powers with respect to all shares of Common Stock beneficially owned by it or him as set forth opposite its or his name.





NAME AND ADDRESS OF BENEFICIAL OWNER

TITLE OF CLASS

NUMBER OF SHARES OWNED (1)


PERCENTAGE OF CLASS (2)Thomas A. Siegfried**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock


44,000,000



4.22
%Robert A. Fugerer**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock


50,395,408



4.83
%Erich Hofer**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock


200,000



*
%Arthur Buckland**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock


25,000,000



2.76
%Matthew Veal**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock


3,291,167



*
%All Officers and Directors

As a Group (5 persons)

Common Stock(3)(4)


122,886,575



13.58
%








* Less than 1%.





** Executive officer and/or director.





(1)
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of November 1, 2010 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.


(2)
Based on 904,681,202  shares of common stock issued and outstanding as of April 11, 2011.








Mr. Fugerer, Chief Technology Officer, resigned from the Sunovia Board of Directors in early 2011.










32






ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.








On December 21, 2005, we acquired the patent rights from Sparx, Inc., a Florida corporation 100% owned by Carl Smith, our former CEO and Chairman and entered into a royalty agreement relating thereto. For the fiscal five months ended December 31, 2009, the Company accrued $50,000 under the royalty agreement. The royalty agreement was terminated by mutual consent of the parties in February 2011.





In February, 2008, the Company agreed to finance Novakor, Inc. an entity controlled by Carl Smith our former CEO and Chairman. Under this agreement, Dongguk performed such research and development services and assigned intellectual property created during the course of those services to Novakor who transferred all such rights to the Company in August, 2008. The Company paid $925,000 on behalf of Novakor to Dongguk in the first year. In August, 2009, all rights of this entity were transferred to the Company without remuneration of any kind to Mr. Smith.





ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Selection of our Independent Registered Public Accounting Firm is made by the Board of Directors. Kingery Crouse & Co. has been selected as our Independent Registered Public Accounting Firm for the current fiscal year. All audit and non-audit services provided by Kingery Crouse & Co. are pre-approved by the Board of Directors which gives due consideration to the potential impact of non-audit services on auditor independence.





In accordance with Independent Standard Board Standards No. 1 (Independence Discussion with Audit Committees), we received a letter and verbal communication from Kingery Crouse & Co. that it knows of no state of facts which would impair its status as our independent public accountants. The Board of Directors has considered whether the non-audit services provided by Kingery Crouse & Co. are compatible with maintaining its independence and has determined that the nature and substance of the limited non-audit services have not impaired Kingery Crouse & Co’s status as our Independent Registered Public Accounting Firm.





Audit Fees


Our principal accountant, Kingery & Crouse, P.A.,  rendered invoices for audit fees for the five months ended December 31, 2010 of $28,986.05. Our former principal accountant, Bobbitt Pittenger & Co., rendered invoices to us during the fiscal periods indicated for the following fees and services:





Fiscal year ended


Fiscal year endedJuly 31, 2010


July 31, 2009Audit fees

$
26,623


$
18,275Audit-related fees

$
19,500


$
19,500Tax fees

Nil


NilAll other fees

Nil


Nil





Audit and audit related fees consist of fees related to professional services rendered in connection with the audit of our annual financial statements, the review of the financial statements included in each of our quarterly reports on Form 10-Q.





Our policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants.  These services may include audit services, audit-related services, tax services and other services.  Under our audit committee’s policy, pre-approval is generally provided for particular services or categories of services, including planned services, project based services and routine consultations.  In addition, we may also pre-approve particular services on a case-by-case basis.  We approved all services that our independent accountants provided to us in the past two fiscal years.





33








ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES







Exhibit No.

Description of Exhibit3.1

Certificate of Change (1)3.2

Agreement and Plan of Merger between Acadia Resources, Inc. and Sunovia Solar, Inc.(2)3.3

Certificate of Merger between Sun Energy Solar, Inc. and Sunovia Solar, Inc. (2)3.4

Certificate of Merger between Acadia Resources, Inc. and Sunovia Energy Technologies, Inc. (2)3.5

Articles of Incorporation (3)3.6

ByLaws (3)4.1

Form of Subscription Agreement (4)10.1

Cancellation of Royalty Agreement10.2

Agreement between the Registrant and Carl Smith dated February 2, 201110.3

Agreement between Sun Energy Solar, Inc. (predecessor in interest to Sunovia Solar, Inc.) and EPIR Technologies, Inc. dated November 1, 2007 (2)10.4

Amended and Restated Research, Development and Supply Agreement, dated January 24, 2008, between EPIR Technologies, Inc. and Sunovia Energy Technologies, Inc. dated January 24, 2008 (5)10.5

Stock Purchase Agreement between EPIR Technologies, Inc. and the Registrant dated January 24, 2008 (5)10.6

Sunovia Energy Technologies, Inc. 2008 Incentive Stock Plan dated May 1, 2008 (2)10.7

Common Stock Purchase Warrant between the Registrant and EPIR Technologies, Inc. dated April 15, 2009 (6)10.8

Amendment No. 1 to the Amended and Restated Research, Development, and Supply Agreement dated April 15, 2009 (6)10.9

Form of Secured Convertible Debenture dated June 15, 2009 (7)10.10

Form of Security Agreement dated June 15, 2009(7)10.11

Form of Subsidiary Guarantee dated June 15, 2009 (7)10.12

Form of Securities Purchase Agreement dated June 15, 2009(7)10.13

Form of Promissory Note December, 2009 and January, 2010 (8)10.14

Form of Promissory Note February, 2010 (8)10.15

Form of Subscription Agreement dated August 24, 2010 ($.02 per share) (9)10.16

Executive Employment Agreement between Arthur Buckland and the Registrant effective September 7, 2010 (10)31.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 193431.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) fo the Securities Exchange Act of 193432.1

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S. C. Section 1350





(1)
Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2007.(2)
Incorporated by reference to the Form 10QSB filed with the Securities Exchange Commission on December 21, 2007(3)
Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and Exchange Commission on January 1, 2007(4)
Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2008.(5)
Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2008.(6)
Incorporated by reference to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on March 16, 2009.(7)
Incorporated by reference to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 13, 2009.(8)
Incorporated by reference to the Quarterly Report on Form 10-Q filed with the Securities Exchange Commission on March 22, 2010.(9)
Incorporated by reference to the Current on Report Form 8-K filed with the Securities Exchange Commission on August 24, 2010.(10)
Incorporated by reference to the Current on Report Form 8-K filed with the Securities Exchange Commission on August 27, 2010.











34








SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.








SUNOVIA ENERGY TECHNOLOGIES, INC.Date: April 19, 2010
By:
/s/ ART BUCKLANDArt BucklandChief Executive Officer (Principal Executive Officer)Date: April 19, 2010
By:
/s/ MATTHEW VEALMatthew VealChief Financial Officer (Principal Financial Officer and Principal Accounting Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Name

Position

Date/s/ ART BUCKLAND

Chief Executive Officer (Principal Executive Officer)

April 19, 2010/s/ MATTHEW VEAL

Chief Financial Officer (Principal Financial Officer and

April 19, 2010Matthew Veal

Principal Accounting Officer) and TreasurerApril 19, 2010/s/ THOMAS A. SIEGFRIED

DirectorThomas A. SiegfriedApril 19, 2010/s/  ERICH HOFERErich Hofer











35

















CONTENTS








FINANCIAL STATEMENTSREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
F-2 - F-3CONSOLIDATED BALANCE SHEETS
F-4CONSOLIDATED STATEMENTS OF OPERATIONS
F-5CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
F-6CONSOLIDATED STATEMENTS OF CASH FLOWS
F-7NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8 - F-28














F-1











October 27, 2009





To The Board of Directors and Stockholders





Sunovia Energy Technologies, Inc.


Sarasota , Florida








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





We have audited the accompanying consolidated balance sheet of Sunovia Energy Technologies, Inc. as of July 31, 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.





We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunovia Energy Technologies, Inc. as of July 31, 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has experienced a loss of $14,471,361 for the year ended July 31, 2009. As of July 31, 2009, the Company also had a working capital deficiency of $1,745,953. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ Bobbit,Pittenger & Company, P.A.


Certified Public Accountants


Sarasota, Florida








F-2























To The Board of Directors and Stockholders





Sunovia Energy Technologies, Inc.


Sarasota, Florida








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





We have audited the accompanying consolidated balance sheets of Sunovia Energy Technologies, Inc. as of December 31, 2010 and July 31, 2010, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the five months and the year then ended.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





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





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunovia Energy Technologies, Inc. as of December 31, 2010 and July 31, 2010, and the results of its operations and its cash flows for the five months and the year then ended in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has experienced losses of $3,898,336 and $20,518,548 for the five months ended December 31, 2010, and the year ended July 31, 2010. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ Kingery & Crouse, P.A.





Certified Public Accountants


Tampa, Florida


April 15, 2011














F-3





Sunovia Energy Technologies, Inc.


Consolidated Balance Sheets


December 31, 2010, July 31, 2010 and 2009


December 31, 2010


July 31, 2010


July 31, 2009ASSETSCurrent assets:Cash and cash equivalents

$
1,285,575


$
1,058,872


$
308,495Accounts receivable, net


491,740



222,084



138,196Accounts receivable, related party


-



20,110



-Inventory


653,307



944,758



234,551Prepaid expenses and other current assets


74,459



22,676



30,347Total current assets


2,505,081



2,268,500



711,589Property and equipment, at cost, net ofaccumulated depreciation of $458,269, $354,869 and $140,697


209,264



304,676



160,462Other assets:Investment in EPIR


-



-



3,780,385Patents and other assets


151,918



155,918



-Note receivable - affiliate


-



-



53,988151,918



155,918



3,834,373$
2,866,263


$
2,729,094


$
4,706,424LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)Current liabilities:Accounts payable and accruals

$
1,054,669


$
1,453,223


$
312,546Non cash compensation payable


-



-



811,638Common stock redemption


650,000



650,000



650,000Current portion of notes payable


598,326



598,326



-Convertible debenture derivative liability


-



1,200,000



683,358Total current liabilities


2,302,995



3,901,549



2,457,542Long term portion of notes payable


230,642



108,000



-Stockholders' equity (deficit):Common stock, $0.001 par value,1,500,000,000 shares authorized,908,010,135, 706,940,353 and 533,493,450shares issued and outstanding


908,010



706,940



533,493Additional paid-in capital


79,140,290



73,829,943



57,014,179Accumulated (deficit)


(79,681,199
)


(75,782,863
)


(55,264,315
)367,101



(1,245,980
)


2,283,357Less: Treasury stock, at cost, 313,400 shares


(34,475
)


(34,475
)


(34,475
)332,626



(1,280,455
)


2,248,882$
2,866,263


$
2,729,094


$
4,706,424


See the accompanying notes to the consolidated financial statements.






F-4




Sunovia Energy Technologies, Inc.


Consolidated Statements of Operations


For the Five Months Ended December 31, 2010 and


For the Years Ended July 31, 2010 and 2009




Five Months


Year


YearEnded


Ended


EndedDecember 31,


July 31,


July 31,2010


2010


2009Sales

$
1,067,903


$
1,587,418


$
996,080Cost of sales


1,218,407



1,785,467



677,724Gross profit (loss)


(150,504
)


(198,049
)


318,356Operating expenses:Research and development


-



7,145,723



6,294,626Selling, general and administrative expenses


3,705,448



7,783,761



8,380,1703,705,448



14,929,484



14,674,796Loss from operations


(3,855,952
)


(15,127,533
)


(14,356,440
)Other (Income) expense:Derivative loss


-



1,663,539



183,358Impairment of investment in EPIR


-



3,680,385



-Interest expense (income), net


42,384



47,091



(68,437
)42,384



5,391,015



114,921Loss before income taxes


(3,898,336
)


(20,518,548
)


(14,471,361
)Income taxes


-



-



-Net loss

$
(3,898,336
)

$
(20,518,548
)

$
(14,471,361
)Per share information basic and diluted:Loss per share

$
(0.00
)

$
(0.03
)

$
(0.03
)Weighted average shares outstanding


882,023,545



666,469,427



534,760,575


See the accompanying notes to the consolidated financial statements.


F-5







Sunovia Energy Technologies, Inc.


Consolidated Statement of Stockholders' Equity (Deficit)


For the Years Ended July 31, 2009 and 2010 and the Five Months Ended December 31, 2010


AdditionalCommon Stock


Paid-in


Accumulated


TreasuryShares


Amount


Capital


(Deficit)


Stock


TotalBalance July 31, 2008


524,543,964


$
524,544


$
48,020,767


$
(40,792,954
)

$
-


$
7,752,357-Shares issued for services


1,139,212



1,139



452,221



-



-



453,360Shares issued for cash


12,305,274



12,305



1,204,198



-



-



1,216,503Stock options and warrants granted for services


-



-



7,332,498



-



-



7,332,498Shares cancelled


(4,495,000
)


(4,495
)


4,495



-



-



-Treasury stock received as income from EPIR


-



-



-



-



(34,475
)


(34,475
)Net (loss) for the year


-



-



-



(14,471,361
)


-



(14,471,361
)Balance July 31, 2009


533,493,450



533,493



57,014,179



(55,264,315
)


(34,475
)


2,248,882Shares issued for services


9,202,693



9,203



781,214



-



-



790,417Shares issued for cash


84,499,854



84,500



3,990,750



-



-



4,075,250Stock options and warrants granted for services


-



-



2,763,485



-



-



2,763,485Exercise of options for cash


1,097,582



1,098



(988
)


-



-



110Shares issued for debenture conversions


30,992,943



30,993



2,632,536



-



-



2,663,529Shares issued to EPIR for research and development


49,600,498



49,600



5,826,430



-



-



5,876,030Shares issued in satisfaction of accruals


1,053,333



1,053



819,337











820,390Shares cancelled


(3,000,000
)


(3,000
)


3,000



-



-



-Net (loss) for the year


-



-



-



(20,518,548
)


-



(20,518,548
)Balance July 31, 2010


706,940,353



706,940



73,829,943



(75,782,863
)


(34,475
)


(1,280,455
)Shares issued for services


3,151,167



3,151



133,771



-



-



136,922Stock options and warrants granted for services


-



-



1,432,209



-



-



1,432,209Shares issued for cash


129,650,000



129,650



2,463,350



-



-



2,593,000Shares issued in satisfaction of accruals


2,870,000



2,870



140,630



-



-



143,500Exercise of options for cash


882,488



883



(796
)


-



-



87Shares issued for debenture conversions


64,516,127



64,516



1,141,183



-



-



1,205,699Net (loss) for the year


-



-



-



(3,898,336
)


-



(3,898,336
)Balance December 31, 2010


908,010,135


$
908,010


$
79,140,290


$
(79,681,199
)

$
(34,475
)

$
332,626


See the accompanying notes to the consolidated financial statements.
    F-6




Sunovia Energy Technologies, Inc.


Statements of Cash Flows
 For the Five Months Ended December 31, 2010 and
 For the Years Ended July 31, 2010 and 2009


Five Months


Year


YearEnded


Ended


EndedDecember 31,


July 31,


July 31,2010


2010


2009Cash flows from operating activities:Net loss

$
(3,898,336
)

$
(20,518,548
)

$
(14,471,361
)Adjustments to reconcile net loss to netcash used in operating activities:Depreciation and amortization


107,400



214,172



74,951Impairment of investment in EPIR


-



3,680,385



-Provision for bad debts


25,000



10,111



18,720Loss on disposal of property and equipment


-



-



8,143Inventory adjustments


-



-



410,839Non cash stock charges


1,574,830



11,093,461



7,785,858Change in fair value of derivative liability


-



16,642



183,358Treasury stock received as income from EPIR


-



-



(34,475
)Changes in assets and liabilities:Accounts receivable


(294,656
)


(93,999
)


(116,617
)Accounts receivable - related party


20,110



(20,110
)


-Inventory


291,451



(710,207
)


(294,125
)Prepaid expenses and other current assets


(51,785
)


7,673



(1,546
)Other assets


-



(1,930
)


-Accounts payable and accrued expenses


(255,052
)


1,149,427



(229,855
)Non cash compensation payable


-



-



(691,736
)Total adjustments


1,417,298



15,345,625



7,113,515Net cash (used in) operating activities


(2,481,038
)


(5,172,923
)


(7,357,846
)Cash flows from investing activities:Acquisition of property and equipment


(7,988
)


(358,386
)


(32,941
)Net cash (used in) investing activities


(7,988
)


(358,386
)


(32,941
)Cash flows from financing activities:Common Shares issued for cash


2,593,087



4,075,360



1,216,503Proceeds from notes payable


122,642



706,326



-Proceeds from convertible debentures


-



1,500,000



500,000Net cash provided by financing activities


2,715,729



6,281,686



1,716,503Increase (decrease) in cash and cash equivalents


226,703



750,377



(5,674,284
)Cash and cash equivalents, beginning


1,058,872



308,495



5,982,779Cash and cash equivalents, ending

$
1,285,575


$
1,058,872


$
308,495Supplemental cash flow information:Cash paid for interest

$
42,421


$
37,208


$
-Cash paid for income taxes

$
-


$
-


$
-Non cash investing and financing activitiesIssuance of common shares in exchange for convertible debentures

$
1,000,000


$
1,000,000


$
-Issuance of common shares in satisfaction of accruals

$
143,500


$
820,390


$
-


See the accompanying notes to the consolidated financial statements.




F-7




SUNOVIA ENERGY TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2010, JULY 31, 2010 AND 2009








NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization, Nature, and Continuance of Operations





Sunovia Energy Technologies, Inc. (“the Company”) is a Nevada corporation engaged in the business of providing energy-efficient and sustainable energy solutions by developing and implementing technology in three main areas:  light emitting diode (LED) lighting, solar energy and infrared.   Through its wholly-owned subsidiary, EvoLucia , Inc., the Company is developing and selling environmentally responsible, energy efficient lighting products that are based on the latest and most efficient light emitting diode (LED) technologies. The Company, through its wholly-owned subsidiary Sunovia Solar, Inc., has also developed technologies in the solar energy arena that improve the efficiency of solar energy production and delivery and have the potential for bringing solar power more quickly to grid parity.  The Company has also developed mercury cadmium telluride infrared cells that increase efficiencies in infrared technology and may provide opportunities for commercial applications of that technology.





In March, 2008, the Company launched a new subsidiary, EvoLucia, Inc. which is the solid state lighting division of the Company. EvoLucia designs, patents, and markets proprietary LED lighting fixtures through strategic partnerships and energy solution providers.





The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  For the five months ended December 31, 2010, and the years ended July 31, 2010 and 2009 the Company has experienced losses of $3,898,336, $20,518,548 and $14,471,361, respectively. To date the Company has funded operations primarily through capital infusions from investors through the sale of its common stock and certain debt instruments, particularly convertible debentures.  The Company anticipates a need for significant funding from capital investment in order to support its operations and continuing as a going concern. The ability of the Company to continue its operations as a going concern is dependent on continuing to raise sufficient new capital to fund its business and development activities and to fund ongoing losses, if needed, and ultimately on generating profitable operations.





The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.





Comparable Prior Period Information





Presented below is the unaudited comparable information for the corresponding prior period.





Five Months Ended December 31, 2009:




Revenue

$
802,309Gross Profit

$
(87,074
)(Loss) From Continuing Operations

$
(8,352,200
)Income Taxes

$
-Net (Loss)

$
(8,352,200
)Net (Loss) Per Share

$
(0.01
)





U


Basis of Consolidation





The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany balances and transactions have been eliminated.





Accounting Method





The Company recognizes income and expenses on the accrual basis of accounting.  The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States.





Use of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period.  Actual results could differ from those estimates. The Company’s significant estimates include the valuation of stock based charges, the valuation of derivatives and the valuation of investments.








F-8


Cash Concentrations




Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents.  The Company maintains cash and cash equivalents in deposit accounts principally with two financial institutions located in the United States.  Management does not believe the Company is exposed to significant risks on such accounts.  Generally, these deposits may be redeemed upon demand and, therefore, bear minimal interest rate risk.  At December 31, 2010, the Company had approximately $989,000 on deposit at a financial institution.





Royalty Agreements





The Company entered into an agreement that required the payment of royalties to Sparx, Inc. , a company owned by the former Chief Executive Officer.  The agreement required the Company to expense royalties as product costs during the period in which the related revenues are recorded.  Included in accrued expenses at July 31, 2010 and 2009, is $124,860 and $51,741 in accrued royalty expense. During the five months ended December 31, 2010, the Company issued 2,870,000 shares of common stock in full satisfaction of $143,500 of these accrued royalties. The Royalty Agreement was mutually terminated as of January 1, 2011 (see Notes B, E and R).





Cash and Cash Equivalents





For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.





Accounts Receivable





The Company extends credit to its customers based upon a written credit policy.  Accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts is the Company’s best estimate for the amount of probable credit losses in the Company’s existing accounts receivable.  The Company establishes an allowance of doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.  Receivable balances are reviewed on an aged basis and account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not require collateral on accounts receivable.





The allowance for uncollectible accounts totaled $53,831, $28,831 and $18,720 at December 31, 2010, July 31, 2010 and 2009, respectively.  Management has not charged interest on accounts receivable as of December 31, 2010.  At December 31, 2010, approximately 34% of net accounts receivable is due from one customer.





Furniture and Equipment





Furniture and equipment are recorded at cost.  Maintenance, repairs and other renewals are charged to expense when incurred.  Major additions are capitalized, while minor additions, which do not extend the useful life of an asset, are charged to operations when incurred.  When property and equipment are sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in operations.  Depreciation is calculated using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives, which range from three to seven years.  Leasehold improvements are amortized using the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter.





Accounting for Long-Lived Assets





We periodically perform impairment tests on each of our long-lived assets, including goodwill and other intangible assets.  In doing so, we evaluate the carrying value of each intangible asset with respect to several factors, including historical revenue generated from each intangible asset, application of the assets in our current business plan, and projected cash flow to be derived from the asset.





The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Where practicable, we will obtain an independent valuation of intangible assets, and place reliance on such valuation.  Then on an ongoing basis, we use the weighted-average probability method outlined in ASC 360,Property, Plant, and Equipment, to estimate the fair value. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we have used are consistent with the plans and estimates that we use to manage our business, based on available historical information and industry averages. The judgments made in determining the estimated useful lives assigned to each class of assets acquired can also significantly affect our net operating results.





According to ASC 360, a long-lived asset should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. We follow the two-step process outlined in ASC 360 for determining if an impairment charge should be taken: (1) the expected undiscounted cash flows from a particular asset or asset group are compared with the carrying value; if the expected undiscounted cash flows are greater than the carrying value, no impairment is recognized, but if the expected undiscounted cash flows are less than the carrying value, then (2) an impairment charge is taken for the difference between the carrying value and the expected discounted cash flows.  The assumptions used in developing expected cash flow estimates are similar to those used in developing other information used by us for budgeting and other forecasting purposes.  In instances where a range of potential future cash flows is possible, we use a probability-weighted approach to weigh the likelihood of those possible outcomes.  For purposes of discounting cash flows, we use a discount rate equal to the yield on a zero-coupon US Treasury instrument with a life equal to the expected life of the intangible asset or asset group being tested.








F-9





The carrying value of the investment in EPIR of $3,780,385 was impaired by $3,680,385 at July 31, 2010, (see Notes G and J). The balance of $100,000 represents the Company’s estimation of the value of a patent application related to solar technology.





Intangible Assets





Intangible assets with an indefinite useful life are not amortized. Intangible assets with a finite useful life are amortized using the straight-line method over the estimated useful life.  All intangible assets are tested for impairment annually during the fourth quarter of the fiscal year or when events indicate impairment.  The Company had an intangible asset consisting of capitalized patent costs at December 31, 2010, July 31, 2010 and 2009 of $143,008, $147,008 and $47,008, respectively.  Patent costs are included in other assets on the balance sheet.  The costs of internally developing, maintaining, or restoring such intangibles that are not specifically identifiable, have indeterminate lives, or are inherent in a continuing business are charged to expense when incurred. During the five months ended December 31, 2010, the Company recorded patent amortization of $4,000.





Accounting for Derivative Instruments





Derivatives are required to be recorded on the balance sheet at fair value (see Note P).  These derivatives, including embedded derivatives in the Company’s structured borrowings, are separately valued and accounted for on the Company’s balance sheet.  Fair values for exchange traded securities and derivatives are based on quoted market prices.  Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates. In addition, additional disclosures is required about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.





Research and Development





Research and Development ("R&D") expenses are charged as an expense when incurred.  The Company has consulting arrangements which typically require a fee to be paid monthly or quarterly.  Samples are purchased that are used in testing, and are expensed when purchased.  R&D costs also include salaries and related personnel expenses, direct materials, laboratory supplies, equipment expenses and administrative expenses that are allocated to R&D based upon personnel costs.





Revenue Recognition





The Company recognizes revenue when the following conditions have been met: there is persuasive evidence an arrangement exists which includes a fixed price; there is reasonable assurance of collection; the services or products have been provided and delivered to the customer; no additional performance is required; and title and risk of loss has passed to the customer.





Products may be placed on consignment to a limited number of resellers.  Revenue for these consignment transactions will also be recognized as noted above.





Shipping and Handling Costs





Amounts charged to customers for shipping and handling of products is recorded as product revenue.  The related costs are recorded as cost of sales.





Advertising





Advertising costs, including direct response advertising costs, are charged to operations as they are incurred. Advertising costs charged to expense for the five months ended December 31, 2010, the years ended July 31, 2010 and 2009 totaled $9,870, $50,000 and $19,090, respectively.





Share-Based Payments





ASC 718,Stock Compensation requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the grant date fair value of the award.





We record the grant date fair value of stock-based compensation awards as an expense over the vesting period of the related stock options.  In order to determine the fair value of the stock options on the date of grant, we use the Black-Scholes option-pricing model.  Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield.  Although the risk-free interest rates and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility, forfeiture rate and option life assumptions require a greater level of judgment which makes them critical accounting estimates.





We use an expected stock-price volatility assumption that is based on historical volatilities of our common stock and we estimate the forfeiture rate and option life based on historical data related to prior option grants.


U






F-10




Income Taxes (Benefits)




We compute income taxes in accordance with FASB ASC Topic 740, Income Taxes.  Under ASC 740, provisions for income taxes are based on taxes payable or refundable during each reporting period and changes in deferred taxes.  Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.   Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.  Also, the effect on deferred taxes of a change in tax rates is recognized in income in the period that included the enactment date.  Deferred taxes are classified as current or non-current depending on the classifications of the assets and liabilities to which they relate.   Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.   If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.





We follow the guidance in FASB ASC Topic 740-10, Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.  The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.





Loss Per Share





Loss per share is computed using the basic and diluted calculations on the statement of operations.  Basic loss per share is calculated by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding for the period.  Weighted average number of shares is adjusted for stock splits and reverse stock splits.  Diluted loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method.  The total number of shares not included in the calculation at December 31, 2010, July 31, 2010 and 2009 based on this methodology was 617,873,486, 545,805,974 and 544,405,974, respectively.





Inventory





Inventory consists of various electronic components used in the assembly of LED lights, power film and batteries.  Inventory is stated at the lower cost or market.  Cost is determined by the first-in, first-out (FIFO) method. Included in selling, general, and administrative expense during the five months ended December 31, 2010, and the years ended July 31, 2010 and 2009 were inventory write-downs related to inventory obsolescence totaling $0, $0 and $410,839, respectively.





Comprehensive Income





We report comprehensive income in accordance with ASC 220, Comprehensive Income.  This statement requires the disclosure of accumulated other comprehensive income or loss (excluding net income or loss) as a separate component of shareholders’ equity.





The Company has no components of comprehensive income and, accordingly, net loss is equal to comprehensive loss for the five months ended December 31, 2010, and the years ended July 31, 2010 and 2009.





Fair Value Measurements





Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:





Level 1:  Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.





Level 2:  Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.  Valuations may be obtained from, or corroborated by, third-party pricing services.





Level 3:  Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.





Fair Value of Financial Instruments





The Company’s financial instruments, including cash and cash equivalents, receivables, accounts payable and accrued liabilities and notes payable are carried at cost, which approximates their fair value, due to the relatively short maturity of these instruments.




Common stock redemption is carried at cost, which approximates their fair value, because it is anticipated that it will be redeemed at this specific amount. The carrying value of the Company’s long-term debt approximates fair value based on borrowing rates currently available to the Company for loans with similar terms.








F-11





Our derivative financial instruments, consisting of embedded conversion features in our convertible debt, which are required to be measured at fair value on a recurring basis under FASB ASC 815-15-25 or FASB ASC 815 as of July 31, 2010 and 2009, are all measured at fair value, using a binomial lattice valuation methodology utilizing Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities (see Note P).  Significant assumptions used in this model as of July 31, 2010 included a remaining expected life of 1 year, an expected dividend yield of zero, estimated volatility of 100%, and risk-free rates of return of approximately 0.3%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the feature and volatility is based on a weighted average of the historical volatility of our stock price.





Reclassifications





Certain amounts as of and for the year ended July 31, 2010 and 2009, have been reclassified in the comparative financial statements to be comparable to the presentation as of and for the period ended December 31, 2010.  These reclassifications had no effect on net loss as previously reported.





NOTE B - ACQUISITION OF PATENT RIGHTS FROM SPARX, INC.





On December 21, 2005, the Company acquired certain patent rights from Sparx, Inc., a Florida corporation 100% owned by Carl. L. Smith III, the Company’s founder and then chief executive officer. As consideration for the assignment of the patent rights, the Company entered into a Royalty Agreement with Sparx, Inc., that provides for a a royalty payment of 4.9% of gross revenues from the patent rights assigned. In September 2010, the Company issued 2,870,000 shares in settlement of the obligation under the Royalty Agreement which was mutually terminated effective January 1, 2011 (see Note R). In addition, the Company granted to Sparx an option to acquire 500,000,000 shares of its common stock at an exercise price of $.10 per share. This option was subsequently modified to permit it to be assigned and in 2009, the option was assigned to Craca Properties, LLC, an entity controlled by Mr. Smith. This option was mutually terminated in February 2011 (see Note R).





NOTE C - INCOME TAXES





The Company's net deferred tax asset as of December 31, 2010, July 31, 2010 and 2009 is as follows:





December 31

July 31,2010

2010

2009Deferred tax assetNet operating loss carry forward

$
29,872,000


$
25,972,000


$
20,726,000Deferred tax asset


9,667,000



8,107,000



5,427,000Valuation allowance


(9,667,000
)


(8,107,000
)


(5,427,000
)Net deferred tax asset

$
-


$
-


$
-





A reconciliation of provision (benefit) for income taxes to income taxes at statutory rate is as follows:





For the Five Month Period

For the

year

For the

yearended

ended

endedDecember 31, 2010

July 31, 2010

July 31, 2009Federal income tax (benefit)at statutory rate

$
(1,243,000
)

$
(1,780,000
)

$
(4,703,000
)State taxes (benefit)


(170,000
)


(900,000
)


(724,000
)Valuation allowance


1,413,000



2,680,000



5,427,000Provision (benefit) for income taxes

$
-


$
-


$
-





The Company has reserved the entire balance of the loss carryforward at December 31, 2010, as it is unable to project whether it will be able to utilize the carryforward. The principal difference between the loss for book purposes and the net operating loss carryforward results principally from stock compensation, derivative losses and research and development. The change in the valuation allowance was $1,413,000 during the period ended December 31, 2010.





The Company has not taken any uncertain tax positions on any of our open income tax returns filed through the period ended December 31, 2010. Our methods of accounting are based on established income tax principles in the Internal Revenue Code and are properly calculated and reflected within our income tax returns. Due to the carry forward of net operating losses, our federal and state income tax returns are subject to audit for periods beginning in 2006.






F-12







NOTE D - FURNITURE AND EQUIPMENT, NET





At December 31, 2010, July 31, 2010 and 2009, furniture and equipment consisted of the following:




December 31,


July 312010


2010


2009Computer equipment

$
301,193


$
326,975


$
249,524Tooling


253, 602



263,052



-Furniture and fixtures


48,060



29,605



14,905Leasehold improvements


64,678



39,913



36,730667,533



659,545



301,159Less: accumulated depreciation


(458,269
)


(354,869
)


(140,697
)Furniture and equipment

$
209,264


$
304,676


$
160,462





Total depreciation and amortization expense for the five months ended December 31, 2010, and the years ended July 31, 2010 and 2009 was $103,400, $214,172 and $74,951, respectively.





NOTE E - STOCKHOLDERS' EQUITY





Common Stock





As of January 31, 2008, the Company redeemed 37,523,114 shares of Sun Energy Solar, Inc. common stock at the issuance price of $.10.  Subsequent to January 31, 2008, the Company issued 28,948,975 shares of Sunovia Energy Technologies, Inc. common stock to shareholders who chose not to receive cash for their shares.  Cash payments totaling $207,385 were made to shareholders of Sun Energy Solar, Inc.  There are 6,500,000 shares of Sunovia Energy Technologies, Inc. common stock still to be issued which is evidenced by an accrued liability of $650,000 at December 31, 2010, July 31, 2010 and 2009.





The Company’s former President cancelled 4,495,000 shares during the year ended July 31, 2009.





During August 2009 the Company issued 19,900,498 shares of common stock to EPIR in payment of the $1,000,000 research and development fee which was due on August 1, 2009. The shares had a fair value of $1,194,030 based on the trading price of the Company’s common stock, which was recorded as research and development.





During August 2009 the Company issued 1,666,666 shares of common stock to an officer of EPIR for consulting services. The shares had a fair value of $116,667 based on the trading price of the Company’s common stock, which was recorded as stock compensation.





During September 2009 the Company issued 30,992,943 shares of common stock for the conversion of $1,000,000 of convertible debentures as described in Note P. In conjunction with the conversion the Company recorded $1,663,529 in paid in capital related to derivative losses.





During October 2009 the Company issued 20,000,000 shares of common stock to EPIR in payment of the $1,000,000 research and development fee which was due on October 1, 2009. The shares had a fair value of $1,800,000 based on the trading price of the Company’s common stock, which was recorded as research and development.





From October 2009 through April 2010 the Company issued 60,407,381 shares of common stock for cash aggregating $2,880,250.





During November 2009 the Company issued 24,092,473 shares of common stock to EPIR and its affiliates for cash aggregating $1,195,000. The shares had a fair value of $3,107,000 based on the trading price of the Company’s common stock. The Company recorded the difference between the fair value and the cash received of $1,912,000 as research and development. In addition, during November 2009 an affiliate of the Company returned 3,000,000 shares of common stock to the Company for cancellation.





During November 2009 the Company issued 1,053,333 shares of common stock in exchange for the cancellation of an accrued liability of $820,390.





During January and February 2010 the Company issued 360,000 shares of common stock for services. The shares had a fair value of $39,600 based on the trading price of the Company’s common stock, which was recorded as stock compensation.




F-13






During March 2010 the Company issued 9,700,000 shares of common stock to affiliates of EPIR in payment of the $1,000,000 research and development fee which was due on March 1, 2010. The shares had a fair value of $970,000 based on the trading price of the Company’s common stock, which was charged to research and development.





During April and July 2010 employees of the Company exercised options to purchase 1,097,582 shares for cash aggregating $110.





During July 2010 the Company issued 6,526,027 shares of common stock to affiliates for services. The shares had a fair value of $595,150 based on the trading price of the Company’s common stock, which was recorded as stock compensation. In addition, during July 2010 the Company issued 650,000 shares of common stock for services. The shares had a fair value of $39,000 based on the trading price of the Company’s common stock, which was recorded as stock compensation.





On August 25, 2010, the Debentures issued on July 30, 2010, in the amount of $1,000,000 and the related derivative liability of $200,000 and accrued interest of $5,699, were settled by conversion into 64,516,127 shares of common stock.





During the five months ended December 31, 2010, the Company received proceeds of $2,593,000 and issued 129,650,000 shares of common stock pursuant to a private placement at $.02 per share. Of these shares, 25,000,000 were issued to an officer.





During the five months ended December 31, 2010, the Company issued 882,488 shares of common stock pursuant to the exercise of options for cash of $87.





During the five months ended December 31, 2010, the Company issued 2,870,000 shares of common stock as payment of a royalty fee of $143,500 to a former officer  (see Notes A, B and R).





During the five months ended December 31, 2010, the Company issued 3,151,167 shares of common stock for services with a fair value of $136,922 based on the trading value of the Company’s common stock which was charged to operations during the period.





Treasury Stock





On April 17, 2009, the Company received 313,410 shares of the Company’s common stock as income from EPIR. The fair value of this transaction totaled $34,475.




NOTE F - RENTAL AND LEASE INFORMATION





Operating Leases





The Company leases office space/warehouse facilities in Sarasota, Florida under an operating lease.  The lease term is for a period of sixty six months and commenced on April 14, 2010.  The base rent over the term is approximately $497,346.  The company is responsible for all taxes, insurance and utility expenses associated with the leased property.





Rental expense for the five months ended December 31, 2010, and the years ended July 31, 2010 and 2009 totaled $34,900, $51,518 and $59,681, respectively.





Future minimum rental payments are as follows:








Year ended December 31,2011

$
83,1552012


83,5142013


87,8272014


92,4992015


100,4072016


8,367$
455,769














F-14





NOTE G - INVESTMENT IN EPIR TECHNOLOGIES, INC.





The Company entered into a research, development and supply agreement (“the Agreement”) with EPIR Technologies, Inc. (EPIR) for an exclusive marketing, supply and development venture for advanced solar photovoltaic (PV) and encapsulate technologies to develop advanced light detection devices and II-VI materials.  The II-VI materials are uniquely combined to form the semiconductors that are used in solar PV technologies.  The Agreement also provides for the commercialization of advanced light detection technologies that form a foundation for accelerating advanced PV development that is aimed at reducing the overall cost of energy from a solar PV System.  The Company and EPIR were developing a solar PV encapsulate that eliminates the need for glass encapsulates that are prevalent in today’s market.





Consideration for the Agreement included exchanging 37,803,852 shares of the Company’s common stock for 20,220,000 after a 100 for 1 stock split (10% of the outstanding) shares of EPIR common stock.  The net profits resulting from the sale of any and all EPIR products, EPIR Independent Products, and related products of the Company, directly or indirectly, to any and all third parties will be split equally between EPIR and the Company.





The investment in EPIR is accounted for under the cost method of accounting because the Company does not exercise significant influence over EPIR’s operations. Under the cost method of accounting, investments are carried at cost and are only adjusted for other-than-temporary declines in fair value and distributions of earnings.





The Company regularly evaluates the recoverability of its investment in EPIR based on the performance and the financial position of EPIR, as well as other evidence of market value.  Such evaluation includes but is not limited to, reviewing EPIR’s financial position, recent financings, projected and historical financial performance, cash flow forecasts and financing needs.





In April, 2009, the Company and EPIR entered into an Amendment to the Agreements. The Amendment (i) accelerated the Company’s payment of the June 1, 2009 scheduled payment and (ii) required the Company to issue to EPIR warrants for the purchase of 25,000,000 shares of the Company’s stock at an exercise price of $0.10 per share (see Note O). The Amendment also permitted the Company to satisfy certain of its payment obligations through the issuances of restricted shares of the Company’s common stock.





Immediately upon the date which EPIR received the accelerated payment, the Company, in its sole discretion, was obligated to, without limitation and subject to the applicability of all of the foregoing provisions of the Agreement, satisfy any or all of the August 1, 2009, October 1, 2009, December 1, 2009 and March 1, 2010 payments either by (1) payment in cash or (2) the issuance of such number of restricted shares of common stock of the Company equal to the quotient of One Million Dollars ($1,000,000) divided by the Conversion Price (as defined below).  For purposes of the EPIR Amendment, the “Conversion Price” shall be an amount equal to the seventy-five percent (75%) of the average closing price of the Company’s common stock as quoted on the Over-the-Counter Bulletin Board for the twenty (20) trading days prior to the date a scheduled payment is due under the EPIR Agreement.





Payments as shown on the following schedule through March 1, 2010 were made by the Company either in cash or common stock.









F-15






The Agreement calls for the Company to make to EPIR the non-refundable payments set forth below:





Payment Amount

Payment to be received by$
1,700,000

November 30, 20071,000,000

February 1, 20081,000,000

April 1, 20081,000,000

October 1, 20081,000,000

December 1, 20081,000,000

March 1, 20091,000,000

June 1, 20091,000,000

August 1, 20091,000,000

October 1, 20091,000,000

December 1, 20091,000,000

March 1, 20101,000,000

June 1, 20101,000,000

August 1, 20101,000,000

October 1, 20101,000,000

December 1, 2010500,000

April 1, 2011500,000

October 1, 2011500,000

April 1, 2012500,000

October 1, 2012500,000

April 1, 2013500,000

October 1, 2013500,000

April 1, 2014500,000

October 1, 2014500,000

April 1, 2015500,000

October 1, 2015500,000

April 1, 2016500,000

October 1, 2016500,000

April 1, 2017500,000

October 1, 2017500,000

March 1, 2017500,000

October 1, 2017$
23,700,000








On June 30, 2008, The Company issued 8,990,000 shares, valued at $10,338,500 or $1.15 per share to employees of EPIR Technologies, Inc. for research. The Company’s Chief Executive Officer and President agreed to cancel 4,495,000 shares each of their outstanding common stock to offset the dilution to the Company’s common stock shares. The Company’s President at the time cancelled 4,495,000 shares during the year ended July 31, 2009 (see Note E).





On April 17, 2009, the Company received 313,410 shares of the Company’s common stock as income from EPIR. The value of this transaction totaled $34,475 (see Note E).





During August 2009 the Company issued 19,900,498 shares of common stock to EPIR in payment of the $1,000,000 research and development fee which was due on August 1, 2009 (see Note E).





During October 2009 the Company issued 20,000,000 shares of common stock to EPIR in payment of the $1,000,000 research and development fee which was due on October 1, 2009 (see Note E).





During March 2010 the Company issued 9,700,000 shares of common stock to affiliates of EPIR in payment of the $1,000,000 research and development fee which was due on March 1, 2010 (see Note E).





As of March 31, 2010, the Company had made all scheduled payments pursuant to the terms and conditions of the Agreement in the aggregate amount of $11,700,000 in cash and common stock (see Note E).





The Company ceased making payments to EPIR effective with the June 1, 2010 payment (see Note J).









F-16









NOTE H – SEGMENT INFORMATION





The Company is organized into operating segments based on product groupings. These operating segments have been aggregated into two reportable business segments: Solar Substrate and Lighting Product. The reportable segments were determined in accordance with the way that management of the Company develops and executes the Company’s operations. The accounting policies of the business segments are the same as the policies described in Note A.





For purposes of business segment performance measurement, the Company does not allocate to the business segments items that are of a nonoperating nature or corporate organizational and functional expenses of a governance nature. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs.





Assets of the Solar segment consist of capitalized patent costs. Assets of the Lighting Product segment consist of cash, receivables, inventory and property and equipment. All other assets including prepaid expenses, deposits, and fixed assets are allocated to Corporate and Other.




Consolidated Operations by Business SegmentFor the five months ended December 31, 2010Solar


Lighting

Product


Corporate

and OtherNet sales

$
-


$
1,067,903


$
-Operating loss

$
-


$
2,976,531


$
879,421Interest and dividends

$
-


$
-


$
42,384Impairment loss

$
-


$
-


$
-Convertible debenture derivative loss

$
-


$
-


$
-Depreciation and amortization

$
-


$
107,400


$
-Assets

$
100,000


$
1,652,137


$
1,114,126Capital Expenditures

$
-


$
7,988


$
-


Of the reported sales approximately $1,062,903 were made domestically and approximately $5,000 were made internationally.




Consolidated Operations by Business SegmentFor the year ended July 31, 2010Solar


Lighting

Product


Corporate

and OtherNet sales

$
-


$
1,587,418


$
-Operating loss

$
7,145,723


$
3,484,519


$
4,497,291Interest and dividends

$
-


$
-


$
47,091Impairment loss

$
3,680,385


$
-


$
-Convertible debenture derivative loss

$
-


$
-


$
1,663,539Depreciation and amortization

$
-


$
-


$
214,172Assets

$
-


$
1,826,183


$
802,911Capital Expenditures

$
-


$
358,386


$
-




Of the reported sales approximately $1,434,000 were made domestically and approximately $153,000 were made internationally.




Consolidated Operations by Business SegmentFor the year ended July 31, 2009Solar


Lighting

Product


Corporate

and OtherNet sales

$
-


$
996,080


$
-Operating loss

$
(6,029,171
)

$
(7,814,448
)

$
(512,821
)Interest and dividends

$
-


$
-


$
68,437Convertible debenture derivative loss

$
-


$
-


$
(183,358
)Depreciation and amortization

$
-


$
-


$
(74,951
)Assets

$
3,780,385


$
533,209


$
392,830





NOTE I - RETIREMENT PLAN





The Company sponsors a 401(k) plan, which allows all eligible employees to contribute a percentage of their salary and receive a safe harbor matching contribution from the Company which cannot exceed certain maximum defined limitations.  The total retirement expense for the five months ended December 31, 2010, and the years ended July 31, 2010 and 2009 was approximately $17,881, $68,283 and $23,000, respectively.





NOTE J - COMMITMENTS AND CONTINGENCIES





EPIR Litigation


In July 2010, EPIR notified the Company that EPIR had terminated the RDS Agreement because of the Company's failure to pay EPIR $1 million that EPIR claims was due June 1, 2010, allegedly in violation of the RDS Agreement. The Company denied to EPIR that EPIR was legally entitled to terminate the RDS Agreement, and asserted that EPIR's own breaches of the RDS Agreement preceded the date when payment of the $1 million specified in the RDS Agreement would otherwise be due, thereby entitling Company to suspend its performance of the RDS Agreement until EPIR complied with the RDS Agreement. During that period EPIR also demanded that the Company allow removal of a restrictive legend from the certificates representing approximately 9,767,838 shares of Company stock which demand the Company, through other counsel, declined unless EPIR furnished certain legal opinions.





EPIR sued the Company in the United States District Court for the Northern District of Illinois in a case designated Case No. 10-4949 on the docket of said court and captioned EPIR Technologies, Inc., Plaintiff v. Sunovia Energy Technologies, Inc., Defendant and Counterclaim Plaintiff v. EPIR Technologies, Inc., Sivananthan Laboratories, Inc. and Sivalingam Sivananthan, Counterclaim Defendants (the "Case").





EPIR filed its Complaint in the case on August 6, 2010, demanding, among other things, damages allegedly resulting from the Company's failure to remove restrictive legends from certificates representing 9,767,838 shares of Company stock, as well as damages from the Company of $1 million for the Company's alleged breach of the RDS Agreement plus interest, attorneys' fees and costs of suit. On August 17, 2010, the Company filed its Answer, Affirmative Defenses, and Counterclaims. The Company's Answer and Affirmative Defenses denied that the Company has breached the RDS Agreement and asserts affirmative defenses to and setoffs against EPIR's claim. The Company's Counterclaims seek damages from, and other relief against EPIR, Sivananthan Labs and Dr. Sivananthan.





The following is a summary of the Case:





EPIR and the Company's predecessor-in-interest entered into the RDS Agreement in November 2007, which was subsequently amended by EPIR and the Company in January 2008 and April 2009. Pursuant to the terms of the RDS Agreement, EPIR and the Company are to cooperate in the development of new technologies (the "New Technologies") identified by a separate board comprised of representatives from both companies. EPIR is to use commercially reasonable efforts to conduct, and the Company will fund, the research and development of such New Technologies. From August 2007 until his resignation in February 2010, Dr. Sivananthan also served as an advisor on the Company's Scientific Advisory Board pursuant to an Agreement for a Member of the Board of Scientific Advisors dated August 27, 2007 (the "Scientific Advisory Board Agreement").









F-18




In September 2009, EPIR requested that the Company, as shareholder of EPIR, execute a written consent to the spin-off of Sivananthan Labs from EPIR (the "Spin-Off"). The Spin-Off was affected so that EPIR could transfer its research equipment to Sivananthan Labs, which was to conduct certain research and development activities that EPIR previously conducted. The Company refused to execute the consent.





In late 2009 and early 2010, a dispute arose between the Company and EPIR in which each claimed that the other had breached the RDS Agreement. The Company alleged that EPIR failed to perform under the RDS Agreement by, among other things, failing to deliver certain deliverables under the RDS Agreement, refusing to provide proper documentation of costs associated with EPIR products sold by the Company and which costs were to be reimbursed to EPIR, and refusing to provide financial information necessary to determine the propriety of EPIR's use of the Company's payments to EPIR.




On May 14, 2010, EPIR presented certificates for approximately 9,767,838 shares of Company stock to the Company's transfer agent and requested that the agent remove the restrictive legends on such shares. The Company directed its transfer agent to refuse to remove the restrictive legends, and requested a legal opinion from EPIR's counsel that such removal would not violate any federal or state securities laws. On June 1, 2010, the Company notified EPIR that it would not make the June 1st scheduled payment under the RDS Agreement, due to EPIR's breach of the Agreement. EPIR claimed this was a material breach of the RDS Agreement.





On July 20, 2010, EPIR purported to terminate the RDS Agreement. On August 6, 2010, EPIR filed a lawsuit against the Company in the U.S. District Court, Northern District of Illinois, ("EPIR's Complaint") alleging: (1) breach of the RDS Agreement ("EPIR's Count I") and (2) violations of Nevada's U.C.C., Nev. Rev. Stat. § 104.8401 ("EPIR's Count II").





EPIR's Count I alleges that the Company made public statements without EPIR's consent in violation of the RDS Agreement. EPIR's Count I further alleges that the RDS Agreement was breached when the Company (i) failed to make a payment to EPIR in the amount of $156,750.00 following the Company's sale of certain EPIR products to a third party, and (ii) failed to make a scheduled payment to EPIR in the amount of $1 million on or about June 1, 2010.





EPIR's Count II alleges that the Company violated Nevada law applicable to certificates representing securities when the Company failed to remove restrictive legends from EPIR-owned shares of Company stock that had been issued more than six month prior to EPIR's request for removal.





EPIR's Complaint seeks damages in an amount not specified for the alleged breach of the RDS Agreement and failure to remove the restrictive legend, with interest, a Court order requiring the Company to direct its transfer agent to remove the restrictive legend on the shares held by EPIR, payment of EPIR's attorneys' fees and costs for the litigation, and any other relief the Court deems just.





The Company filed an Answer, Affirmative Defenses, as well as Counterclaims against EPIR, Dr. Sivananthan and Sivananthan Labs, on August 17, 2010. The Answer denies EPIR's material allegations, and the Company's Counterclaim alleges twelve counts against EPIR, Dr. Sivananthan and or Sivananthan Labs.





Counts I and II of the Counterclaim are claims against EPIR for breach of the RDS Agreement, alleging EPIR breached the agreement when it filed patent applications for intellectual property relating to the New Technology and jointly owned by the parties without naming the Company as an inventor or assignee, and failed to inform the Company of such intellectual property in violation of the RDS Agreement. The applications referred to in the Counterclaim are Patent Application Nos. 12/261,827 and 12/331,892. Counts IV and V of the Counterclaim are claims against EPIR and Dr. Sivananthan for fraud, alleging that they misrepresented that they would not file patent applications for the intellectual property covered under Patent Application Nos. 12/261,827 and 12/331,892, respectively.





Count III of the Counterclaim is a claim against EPIR for breach of the RDS Agreement, alleging EPIR breached the agreement by, among other things, failing to report the existence of joint intellectual property to the Company, failing to make commercially reasonable efforts to conduct the research and development activities it was supposed to conduct, and refusing to perform or otherwise rendering itself unable to perform under the RDS Agreement in connection with the Spin-Off.





Count VI of the Counterclaim is a claim against Sivananthan Labs for tortuous interference with a business relationship, which alleges that Sivananthan Labs interfered with the Company's agreement inducing EPIR to transfer its research and development business and equipment to Sivananthan Labs, an entity separate from EPIR for the purpose of denying the Company the benefits of the relationship.









F-19




Count VII of the Counterclaim is a claim against Dr. Sivananthan and Sivananthan Labs for constructive trust, alleging each of them are in possession of shares of Company stock which were acquired by EPIR through its fraudulent acts, breaches of fiduciary duty, and other coercive and wrongful acts directed at the Company, and such shares should be held in a constructive trust.




Count VIII of the Counterclaim is a claim against EPIR for declaratory judgment, and alleges that a controversy exists between the parties regarding whether the Company has an exclusive right to purchase any products from EPIR for resale, whether EPIR has breached the RDS Agreement, whether further scheduled payments by the Company are due to EPIR given its breach until EPIR resumes performance, and whether EPIR has validly terminated the RDS Agreement.




Counts IX and X of the Counterclaim are claims against EPIR and Sivananthan Labs, respectively, for violations of the Illinois Business Corporations Act, 805 ILCS § 5/7.75. The claims allege that the Company, as a shareholder of each of EPIR and Sivananthan Labs, gave each of those parties a written demand for inspection of corporate books and records and each failed to make its records available for such an inspection in violation of the Act.





Count XI of the Counterclaim is a claim against Dr. Sivananthan for Violation of the Illinois Business Corporations Act, 805 ILCS 5/12.56, alleging that Dr. Sivananthan acted in a manner that is oppressive with respect to the Company in that he, as director, caused EPIR to intentionally dilute the Company's shares of EPIR stock for his own benefit, and caused EPIR's assets to be misapplied and wasted in violation of the Act.





Count XII of the Counterclaim is a claim against Dr. Sivananthan, for breach of the fiduciary duty he has under the Scientific Advisory Board Agreement by acting in conflict with the Company's interests.





The Company's Counterclaims seek, among other relief, the following:





An injunction forbidding EPIR from transferring any of its right, title or interest in or under Patent Application Nos. 12/261,827 and 12/331,892, any foreign counterpart patent application, or any continuation, continuation in part, divisional reissue or other related applications or patents that may issue thereon, or licensing or directly or indirectly assisting or participating in the practice of any of the inventions claimed in any thereof, except in accordance with the provisions of the RDS Agreement, and (2) licensing or directly or indirectly assisting or participating in the practice of any of the inventions claimed in any thereof, except in accordance with the provisions of the RDS Agreement, subject, with respect to Patent Application No. 12/331,892, to any valid claims affecting rights under any license to the United States federal government, except in accordance with the provisions of the RDS Agreement;





An order requiring EPIR to assign to the Company a 50% ownership of any of EPIR's right, title and interest in or under Patent Application Nos. 12/261,827 and 12/331,892, any foreign counterpart patent application, or any continuation, continuation in part, divisional reissue or other related applications or patents that may issue thereon; provided any assignment with respect to Patent Application No. 12/331,892 is subject to any valid claims affecting rights under any license to the United States federal government, except in accordance with the provisions of the RDS Agreement;





An injunction forbidding EPIR from (1) transferring any of EPIR's right, title or interest in or under joint intellectual property as defined in the RDS Agreement, (2) licensing or directly or indirectly assisting or participating in the practice of such joint intellectual property, except in accordance with the provisions of the RDS Agreement;





An order requiring EPIR to return to the Company shares of Company stock issued to or on instruction of EPIR in satisfaction of scheduled payments under the RDS Agreement;





An order requiring Dr. Sivananthan to return to the Company shares of Company stock issued to him;





An order requiring Sivananthan Labs to return to the Company shares of Company stock received from it in connection with the Spin-Off;





An order requiring that all shares of stock of Company possessed by Sivananthan Labs and Dr. Sivananthan that were wrongfully obtained by EPIR and/or Dr. Sivananthan be held in constructive trust for the benefit of the Company;





An order declaring that EPIR is required to sell its products exclusively to the Company;





An order declaring that EPIR has breached the RDS Agreement and therefore the Company is not obligated to make further scheduled payments;





An order declaring that EPIR has not validly terminated the RDS Agreement;





An order compelling EPIR to allow the Company's examination of books and records requested in its letter that EPIR refused to allow the Company to inspect or claimed not to possess;





F-20





An order compelling Sivananthan Labs to allow the Company's examination of books and records requested in its letter that Sivananthan Labs refused to allow the Company to inspect or claimed not to possess;





Damages not less than $12 million from EPIR, or restitution;


Damages not less than $12 million from Dr. Sivananthan;


Damages of more than $75,000 from Dr. Sivananthan, or restitution; Removal of Dr. Sivananthan as a director of EPIR;


Punitive damages; and


The Company's reasonable attorneys' fees and costs





On October 12, 2010, EPIR and Dr. Sivananthan jointly filed an Answer and Affirmative Defenses to the Company's Counterclaim, and filed a Motion to Dismiss Counts IV and V of the Counterclaim. The Answer denies the Company's material allegations and asserts various affirmative defenses. The Motion to Dismiss alleges that the Company fails to state a claim for fraud against EPIR and Dr. Sivananthan. The Company filed its response on November 9, 2010, and EPIR and Dr. Sivananthan filed a reply on November 16, 2010. The Court has not yet ruled on the motion to dismiss.





On October 22, 2010, Sivananthan Labs filed a Motion to Dismiss Counts VI, VII and X of the Counterclaim, alleging the Company fails to state a claim for tortious interference with a business relationship, constructive trust and violation of the Illinois Business Corporations Act. The Company filed its response on November 16, 2010 and Sivananthan filed its reply on December 2, 2010. The Court has not yet ruled on the motion to dismiss.





At this time, the Company's management intends to vigorously defend against EPIR's Complaint, and to vigorously pursue the Company's Counterclaims. It is too early in the proceeding to determine the extent, if any, of our possible exposure in the lawsuit.  As such, no effect has been given herein to any loss that may result from the resolution of this matter in the accompanying consolidated financial statements.





As discussed above the Company was unable this year to obtain financial and other data needed to evaluate its investment in EPIR Technologies, Inc. in prior years, EPIR provided timely copies of its financial audits and other information in accordance with our agreement with EPIR. However, since we are unable to obtain the information and also face the uncertainties associated with a lawsuit, management believes that a write-down of its investment in EPIR was appropriate.








In addition, the Company is defending a lawsuit brought by a supplier of a component part of its LED lighting fixtures. The suit alleges that the Company owes a re-stocking fee in excess of $100,000 for the return of certain parts. The Company believes it has substantial defenses to this suit and intends to vigorously defend it. The lawsuit is in the early stages of pleadings, and the outcome is uncertain. No significant legal fees have been incurred in this case to date.


NOTE K - RELATED PARTY TRANSACTIONS





Transactions with related parties during the five months ended December 31, 2010, and the years ended July 31, 2010 and 2009 include the royalty and option agreements discussed in notes B and R, the equity issuances discussed in Note E, the consulting agreements discussed in Note M, the debt and note agreements discussed in Note P and the stock options discussed in Note O.





NOTE L - RISKS AND UNCERTAINTIES





Operating results may be affected by a number of factors.  The Company depends upon a number of major inventory and intellectual property suppliers.  Presently, the Company does not have formal arrangements with any supplier.  In the future, if the Company is unable to obtain satisfactory supplier relationships, or a critical supplier had operational problems, or ceased making material available, operations could be adversely affected.





Concentrations





During the five months ended December 31, 2010, the Company made sales aggregating $548,018 to two customers, which sales individually represented in excess of 10% of the Company’s net revenues. At December 31, 2010, approximately 34% of net accounts receivable is due from one customer.





During the year ended July 31, 2010, the Company made sales aggregating $1,004,916 to four customers, which sales individually represented in excess of 10% of the Company’s net revenues. At July 31, 2010, approximately 48% of net accounts receivable was due from one customer.





NOTE M - EMPLOYMENTCONTRACTS AND CONSULTING AGREEMENTS





The Company has various employment and consulting contracts with its executives and consultants, described more fully below:





During the fiscal year ended July 31, 2010, Carl L. Smith, III served as Chief Executive Officer (through September 7, 2010) pursuant to an employment agreement dated November, 2009 . Under this Agreement, Mr. Smith was entitled to compensation 2,000,000 shares of restricted common stock of the Company per year. Mr. Smith resigned as Chief Executive Officer on September 7, 2010, upon the hiring of Mr. Buckland (See below).





The Company entered into a change of control severance agreement with Mr. Smith on December 21, 2005.  Under this agreement,


if there is a change of control of the Company, as defined within the agreement, and Mr. Smith’s employment is terminated without cause (or if he terminates his employment for good reason, as defined in the agreement) within 2 years after the change of control, he will be entitled to receive a severance payment equal to the one year’s salary and bonus and continued health benefits. If Mr. Smith is required to relocate, he is also entitled to relocation expenses up to a maximum of $50,000. Such payments are to be made within five business days after the termination of employment. Also, if any person, entity, or group acquires beneficial ownership of 20% or more of the Company, this agreement entitles Mr. Smith to a grant of shares of common stock sufficient to give him a voting majority of shares needed for any stockholder meeting, provided those shares are available for issuance. This agreement was mutually terminated in February 2011 (see Note R).








F-21





During fiscal year 2010, Craig Hall, a business advisor and co-founder of the Company, served as a consultant to the Company pursuant to  an agreement with the Company dated November, 2009. Under that agreement, Mr. Hall was entitled to compensation of 2,000,000 shares of restricted common stock of the Company.  In December, 2010, Mr. Hall became National Account Manager for the Company, and his prior consulting agreement was terminated.





Robert Fugerer, Chief Technology Officer of the Company, served pursuant to an employment agreement dated July 2010, which provides for an annual salary of $150,000 plus benefits on the same terms as available to other employees.  The agreement also provides that Mr. Fugerer is entitled to certain severance benefits in the event his employment is terminated by the Company. This agreement was mutually terminated in February 2011 (see Note R).





Matthew Veal, the Company’s Chief Financial Officer, served pursuant to an employment agreement dated  May 2008, which was modified in August 2010. Mr. Veal is entitled to an annual salary of $100,000 per year and has been granted stock options to purchase 488,060 shares of common stock at $0.62 per share. In August, 2010, Mr. Veal’s agreement was modified to include an option to purchase up to 1% of the Company’s common stock at $.10 per share in the event his employment is terminated by the Company. The agreement was mutually terminated in February 2011 (see Note R).





Effective May 1, 2008, the Company modified employment agreements with several of its employees. Under the agreements, options to acquire an aggregate of 4,880,600 shares of common stock were granted to ten employees including the Chief Financial Officer. Most of those agreements were modified in April, 2010, and employees were granted 5,450,000 options at an exercise price of $.0001.





On March 17, 2008, the Company entered into an amended and restated consulting agreement with Fernando Cuza, who provides services related to the introduction of the Company to nationally recognized entities for product distribution opportunities, introduction to potential sales leads and acting as a liaison to various corporations.  The term of the agreement was effective through May 2009. As compensation for providing such services, the Company issued (i) an option to purchase an aggregate of 25,000,000 shares of common stock of the Company at an exercise price of $0.005 on a cashless basis for a term of seven years and (ii) an option to purchase an aggregate of 5,000,000 shares of common stock of the Company at an exercise price of $0.005 on a cashless basis for a term of seven years, which were issued in January 2009.





In August 2010, the Company entered into a three-year agreement with Kenneth Juster, a strategic business advisor.  Mr. Juster scrutinizes Company products and opportunities, and makes recommendations for realizing value and furthering efficiencies within the Company, particularly in the legal area.   Under the agreement, Mr. Juster received 1,000,000 shares of restricted stock of the Company and an option to purchase 3,000,000 shares at an exercise price of $0.042. The term of this option expires on August 5, 2015.





In August 2007, the Company entered into a ten year agreement with Dr. Sivalingam Sivananthan to serve as a scientific advisor to the Company.  Under the agreement the Company granted Dr. Sivananthan 6,000,000 shares of common stock initially and 1,666,666 shares for each year of service commencing with the completion of the second year of services and terminating at the completion of the tenth year of services. In March, 2010, Dr. Sivalingam terminated this contract.





In June, 2008, the Company entered into an agreement with Kauffman Consulting, Inc. Kauffman served as the Company’s principal engineering consultant for strategic product development and marketing support efforts. In consideration for services rendered, the Company paid Kauffman on an hourly basis. In addition, the Company provides an option to purchase up to 3,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share. The options vest according to a schedule over a period of three years.  During the years ended July 31, 2009 and 2010, options to acquire an aggregate of 2,000,000 shares (1,000,000 in each of the two years) vested. The Company terminated this agreement in October, 2010 and is currently negotiating a revised agreement.





On June 30, 2008, the Company issued 8,990,000 shares to employees of EPIR Technologies Inc. as compensation. Mr. Smith and Mr. Fugerer each agreed to cancel 4,495,000 shares of their common stock each to offset the dilution to the Company’s common stock caused by this issuance. Mr. Fugerer canceled 4,495,000 shares of his common stock in 2009. With the Company’s consent, Mr. Smith canceled 3,328,333 shares in satisfaction of this agreement in February 2011.





On June 16, 2010, the Company entered into an  agreement with Erich Hofer in which he agreed to serve as a director of the company for a term of three (3) years.  In consideration of the services to be rendered by him as a director, the Company agreed to pay him a fee of $2,000 per month and issue him 200,000 shares of common stock of the Company per year.





On June 16, 2010, the Company entered into a Cooperation Agreement with Mr. Hofer for a term of one (1) year, pursuant to which he is to introduce the Company to organizations, companies and/or individuals which he has vetted (the “Services”) for the purpose of transacting business.  As consideration for the Services, upon closing of a transaction resulting from the Services, the Company agreed to pay him a fee of 7.0% of the determined value of said transaction, 80% of which will payable in shares of common stock valued at the ten day trailing average closing bid price on the day of such closing and 20% of which will be paid in cash.





Additionally, on June 16, 2010, the Company entered into a Strategic Sales and Marketing Agreement with Mr. Hofer, for a term of one (1) year, whereby the Company appointed him as its sales representative to undertake selling the Company’s solid state lighting fixtures and renewable energy products to customers (the “Sales”).  In consideration for the Sales, the Company agreed to pay him up to a 10% sales commission.






F-22





On August 30, 2010, the Board of Directors approved the appointment of Arthur Buckland as Chief Executive Officer and director of the Company effective September 7, 2010.





As per the terms of the Employment Agreement by and between the Company and Mr. Buckland that the parties executed on August 27, 2010 and is effective September 7, 2010, Mr. Buckland’s term of employment with the Company will be at will.  Either Mr. Buckland or the Company may terminate the employment relationship at any time without notice or cause.  In consideration for Mr. Buckland’s services as CEO and director, the Company shall compensate Mr. Buckland an annual base salary of $300,000.  Mr. Buckland’s Base Salary will be subject to modification during the employment in accordance with the Company’s practices, policies, and procedures but will not be reduced without Mr. Buckland’s mutual agreement.





In addition, Mr. Buckland will be eligible to earn (A) an annual target bonus of up to fifty percent (50%) of his Base Salary measured as of the end of the preceding fiscal year, payable in cash when other Company executives are paid their bonuses, and (B) a stock bonus up to an additional two percent (2%) of the Company’s fully-diluted issued and outstanding.  The calculation of the number of shares issued and outstanding will be based on the actual outstanding shares on a fully diluted basis and will not include the option held by Craca LLC.  Bonus plan objectives shall be determined by the Board and Mr. Buckland by December 7, 2010 and then established annually thereafter.  Any bonus for fiscal 2010 will be prorated for the partial year.  The Company reserves the right to recognize and reward special contributions Mr. Buckland may make to the Company.  The Company may, from time to time and at any time, pay, or cause to be paid, to Mr. Buckland such bonus compensation, if any, as the Board may, in its sole and absolute discretion, determine to be appropriate.





Mr. Buckland shall also have the option to purchase seventy-two million (72,000,000) shares of the Company’s stock.  The exercise price for such option will be equal to the fair market value of the underlying common stock on the date of the grant, with fair market value to be determined with reference to the closing stock price on the OTC-BB on the grant date, or if the common stock is no longer quoted on the OTC-BB, then the fair market value shall be fixed by the Board in accordance with a valuation conducted in compliance with Section 409A of the Internal Revenue Code of 1986, as amended.  Mr. Buckland’s options shall be subject to Company’s standard four (4) year vesting provisions:  twenty-five percent (25%) to vest after the first twelve (12) months of continuous service with the Company, with monthly ratable vesting thereafter for the remaining option shares.





NOTE N - STOCK COMPENSATION





The Company has recorded expenses, paid or accrued in common stock or common stock options, of $1,569,131, $11,093,461 and $7,785,858 for the five months ended December 31, 2010, and the years ended July 31, 2010 and 2009, respectively. For the year ended July 31, 2009, consulting expenses paid or accrued for payment in common stock or common stock options, totaled $7,785,858.





NOTE O – STOCK OPTIONS





On May 1, 2008, the Company adopted the 2008 Incentive Stock Plan (“the Plan”) designed to retain directors, employees, executives and consultants and reward them for making major contributions to the success of the Company. The Plan was approved by the Company’s shareholders in November, 2010. The following is a summary of the Plan and does not purport to be a complete description of all of its provisions.





The Plan is administered by the board of directors. The plan did not have any individual caps other than the limitation of granting incentive stock options to employees, the exercise of more than $100,000 per year in fair market value of stock per year. The plan permits the grant of restricted stock and nonstatutory options to participants where appropriate. The maximum number of shares issuable under the Plan is 30,000,000. The Plan shall terminate ten years from the date it was adopted. The board of directors may, as permitted by law, modify the terms of any grants under the Plan, and also amend, suspend, or extend the Plan itself.





On October 1, 2008, the then Chief Executive Officer effectively cancelled 500,000 of his 500,000,000 outstanding options. The equivalent options, exercisable at $.10, were then issued to a consultant under an agreement dated October 1, 2008 (see Note M). The consulting expense related to these options totaled $275,000 The Company also granted an option for an additional 200,000 shares of common stock to the consultant on October 1, 2008, exercisable at $.4875. The consulting expense related to these options totaled $116,020.





On October 28, 2008, the then Chief Executive Officer agreed to effectively cancel options covering 3,000,000 shares (see Note M). The equivalent options, exercisable at $.10, were issued to the strategic business advisor under the revised agreement. 1,000,000 shares vested retroactively as of the original date of the contract of July 2007. 1,000,000 shares vested on July 16, 2009 with the remainder vesting on July 16, 2010. The consulting expense related to these options totaled $1,500,000.





On November 13, 2008, options for 3,800,000 shares, exercisable at $.10, were granted to a consultant. The options vested during the year ended July 31, 2009. The consulting expense related to these options totaled $1,919,054.





The fair values of the October 1, 2008 options for 200,000 shares and the November 13, 2008 options for 3,800,000 shares are estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk-free interest rates of 6%, expected volatility of 130% and expected life of 5 years.  No dividends were assumed in the calculations.






F-23





The fair values of the October 1, 2008 and October 28, 2008 options for 500,000 and 2,000,000 shares are estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk-free interest rates of 6%, expected volatility of 130% and expected life of 15 years.  No dividends were assumed in the calculations.





On December 31, 2008, options for 100,000 shares were issued to a consultant to the Company for services, exercisable at a price of $.10. The consulting expense related to these options totaled $20,674.





On January 1, 2009, options for 5,000,000 shares were issued to a consultant to the Company for services, exercisable at a price of $.005. The consulting expense related to these options totaled $843,582.





On January 1, 2009, options for 162,687 shares were issued to an employee of the Company for services, exercisable at $.62. The consulting expense related to these options totaled $15,928.





On January 12, 2009, options for 162,687 shares were issued to an employee of the Company for services, exercisable at $.62. The consulting expense related to these options totaled $13,562.





On January 27, 2009, options for 1,900,000 shares were granted to a consultant to the Company for services, exercisable at a price of $.10. The options vest over a period of three years, with 8.33% vesting each quarter. Options for 100,000 shares were also issued to two individuals that work for this consultant, exercisable at a price of $.10. The consulting expense related to these options totaled $32,284.  The unrecognized compensation expense associated with these options is $161,496.





The fair value of the December 31, 2008 options for 100,000 shares is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk-free interest rates of 6%, expected volatility of 130% and expected life of 1 year.  No dividends were assumed in the calculations.





The fair value of the January 1, 2009 options for 5,000,000 shares is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk-free interest rates of 6%, expected volatility of 130% and expected life of 7 years.  No dividends were assumed in the calculations.





The fair value of the January 1, 2009 and January 12, 2009 options for 162,687 shares each is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk- free interest rates of 6%, expected volatility of 130% and expected life of 3 years.  No dividends were assumed in the calculations.





The fair value of the January 27, 2009 options for a total of 2,000,000 shares is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk-free interest rates of 6%, expected volatility of 130% and expected life of 1 year.  No dividends were assumed in the calculations.





On April 15, 2009, warrants for 25,000,000 shares were granted to EPIR, exercisable at a price of $.10 (see Note G). The research and development expense related to these warrants totaled $2,546,944.





The fair value of the April 15, 2009 warrants for 25,000,000 shares is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk-free interest rates of 2.82%, expected volatility of 130% and expected life of 7 years.  No dividends were assumed in the calculations.





From February through April, 2010 the Company granted options to purchase 5,650,000 common shares at an exercise price of $.0001 per share to several employees. The term of these options is five years. The fair value of the options is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk-free interest rates of 3.0%, expected volatility of 130% and expected life of 5 years.  No dividends were assumed in the calculations. The fair value of the options aggregated $531,566 of which $124,785 was charged to operations during the year ended July 31, 2010.





During the year ended July 31, 2010, an aggregate of $2,638,700 was charged to operations related to options granted during prior years.





At July 31, 2010, there was an aggregate of $1,541,700 of unrecognized charges related to stock options which vest in future periods.





From August through December 2010 the Company granted options to purchase 72,000,000 common shares at an exercise price of $.045 per share for a period of five years to an officer and options to purchase 3,000,000 common shares at an exercise price of $.045 per share for a period of five years to a consultant. The fair value of the options is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used: risk-free interest rates of 3.0%, expected volatility of 130% and expected life of 5 years.  No dividends were assumed in the calculations. The fair value of the options aggregated $3,241,291 of which $430,192 was charged to operations during the five months ended December 31, 2010.





During the five months ended December 31, 2010, an aggregate of $1,002,017 was charged to operations related to options granted during prior years.





At December 31, 2010, there was an aggregate of $3,468,483 of unrecognized charges related to stock options which vest in future periods.






F-24





A summary of stock options is as follows:





December 31, 2010Outstanding




Weighted-AverageWeighted-Average


Aggregate

RemainingShares


Exercise Price


Intrinsic Value

Contractual LifeOptions outstanding atbeginning of year


545,805,974


$
0.104Options granted


75,000,000



0.044Options cancelled/exercised


(2,932,488)



0.001Outstanding at December 31, 2010


617,873,486


$
0.097


$
0.00

8.5 yearsExercisable at December 31, 2010


545,833,486


$
0.104


$
0.00

9.0 years








July 31, 2010Outstanding




Weighted-AverageWeighted-Average


Aggregate

RemainingShares


Exercise Price


Intrinsic Value

Contractual LifeOptions outstanding atbeginning of year


544,405,974


$
0.104Options granted


5,650,000



0.001Options cancelled/exercised


(4,250,000
)


0.001Outstanding at July 31, 2010


545,805,974


$
0.104


$
0.00

9.6 yearsExercisable at July 31, 2010


543,005,924


$
0.104


$
0.00

9.6 years











July 31, 2009Outstanding




Weighted-AverageWeighted-Average


Aggregate

RemainingShares


Exercise Price


Intrinsic Value

Contractual LifeOptions outstanding atbeginning of year


507,980,600


$
0.105Options granted


39,925,374



0.092Options cancelled


(3,500,000
)


0.100Outstanding at July 31, 2009


544,405,974


$
0.104


$
277,250

10.6 yearsExercisable at July 31, 2009


539,739,174


$
0.104


$
277,250

10.6 years





The unvested options vest as follows:





2011 – 2,440,300; 2012 – 325,374; 2013 – 3,200,000; 2014 and beyond – 66,074,326








Aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (difference between the Company’s closing stock price on December 31, 2010 and July 31, 2010, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the option holders exercised their options on December 31, 2010 and July 31, 2010. This amount will fluctuate based on the fair market value of the Company’s stock.





NOTE P – NOTES PAYABLE AND CONVERTIBLE DEBENTURES





Convertible Debentures





On July 2, 2009 and August 12, 2009, the Company entered into two securities purchase agreements (the “Agreements”) with accredited investors (the “Investors”) pursuant to which the Investors purchased an aggregate principal amount of $1,000,000 of 12% Senior Secured Convertible Debentures ($500,000 under each Agreement) for an aggregate purchase price of $1,000,000 (the “Debentures”). The Debentures bore interest at 12% and matured twelve months from the date of issuance. The Debentures were convertible at the option of the holder at any time into shares of common stock, at an initial conversion price equal to the lesser of (a) $0.10 or (b) an amount equal to 50% of the lowest closing bid price of the common stock for the five trading days immediately preceding the conversion date; provided, however, in no event would the conversion price be less than $0.03 per share. On September 28, 2009, all of the Debentures, including the related derivative liability and accrued interest, were settled by conversion into 30,992,943 shares of common stock.





The full principal amount of the Debentures was due upon a default under the terms of the Debentures. The Debentures ranked senior to all current and future indebtedness of the Company and were secured by substantially all of the assets of the Company. The Company’s obligations under the Debentures were guaranteed by the Company’s wholly-owned subsidiaries. At any time prior to the maturity of the Debentures, the Company could, upon written notice, redeem the Debentures in cash at 120% of the then outstanding principal amount of the Debentures, plus accrued interest thereon, provided the closing bid price of the Company’s common stock was less than $0.10 at the time of the redemption.






F-25





The conversion price of the Debentures was subject to full ratchet anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments for stock splits, stock dividends, recapitalizations and the like. Because of the full ratchet anti-dilution protection, the Company determined that the conversion feature of the Debentures should be accounted for separately at fair value as a derivative instrument liability and marked-to-market each period, with any change in fair value recorded as non-operating, non-cash income or expense.





The fair value of the embedded conversion options were determined using a binomial valuation model, adjusted as appropriate to reflect the company’s option to redeem the Debentures at 120% of the then outstanding amounts. At July 2, 2009, the fair value of the embedded derivative liability related to the initial $500,000 Debentures was $600,000, which exceeded the face value of the Debentures by $100,000. The fair value of the embedded conversion option at July 31, 2009 was $604,767.





At August 28, 2009, the fair value of the embedded derivative liability related to the second $500,000 Debentures was $600,000, which exceeded the face value of the Debentures by $100,000. At September 28, 2009, when all the Debentures were converted to common stock, the option to redeem the Debentures at 120% of the then outstanding amount was not available to the Company and the fair value of the embedded derivative liabilities related to the Debentures was $1,320,804 and $1,326,094, respectively.





On July 30, 2010, the Company entered into a securities purchase agreement with accredited investors (the “Investors”) pursuant to which the Investors purchased an aggregate principal amount of $1,000,000 of 12% Senior Secured Convertible Debentures for an aggregate purchase price of $1,000,000 (the “Debentures”). The Debentures bear interest at 12% and mature twelve months from the date of issuance. The Debentures are convertible at the option of the holder at any time into shares of common stock, at an initial conversion price equal to the lesser of (a) $0.10 or (b) an amount equal to 50% of the lowest closing bid price of the common stock for the three trading days immediately preceding the conversion date; provided, however, in no event would the conversion price be less than $0.03 per share.





The full principal amount of the Debentures is due upon a default under the terms of the Debentures. The Debentures rank senior to all current and future indebtedness of the Company and are secured by substantially all of the assets of the Company. The Company’s obligations under the Debentures are guaranteed by the Company’s wholly-owned subsidiaries. At any time prior to the maturity of the Debentures, the Company may, upon written notice, redeem the Debentures in cash at 120% of the then outstanding principal amount of the Debentures, plus accrued interest thereon, provided the closing bid price of the Company’s common stock was less than $0.10 at the time of the redemption.





The conversion price of the Debentures is subject to full ratchet anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments for stock splits, stock dividends, recapitalizations and the like. Because of the full ratchet anti-dilution protection, the Company determined that the conversion feature of the Debentures should be accounted for separately at fair value as a derivative instrument liability and marked-to-market each period, with any change in fair value recorded as non-operating, non-cash income or expense.





The fair value of the embedded conversion options were determined using a binomial valuation model, adjusted as appropriate to reflect the company’s option to redeem the Debentures at 120% of the then outstanding amounts. At July 30, 2010, the fair value of the embedded derivative liability related to the $1,000,000 Debentures was $1,200,000, which exceeded the face value of the Debentures by $200,000. The fair value of the embedded conversion option at July 31, 2010 was $1,200,000.





On August 25, 2010, the Debentures, including the related derivative liability and accrued interest, were settled by conversion into 64,516,127 shares of common stock (see Note E).





Notes Payable





From December 2009 through July 2010 the Company borrowed an aggregate of $706,326 from certain shareholders. In addition, from August 2010 through December 2010 the Company borrowed $122,642 from a shareholder. The borrowings are evidenced by notes which bear interest at 10% per annum and are due between 12 months and 24 months from the date of issuance.





The balance is due as follows: Year ended December 31, 2011: $598,326 – Year ended December 31, 2012: $230,642





NOTE Q - RECENT ACCOUNTING PRONOUNCEMENTS





The Financial Accounting Standards Board (FASB) ratified Accounting Statement Update (ASU) 2009-13 (ASU 2009-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” which eliminates the residual method of allocation, and instead requires companies to use the relative selling price method when allocating revenue in a multiple deliverable arrangement. When applying the relative selling price method, the selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists and otherwise using third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, companies shall use their best estimate of the selling price for that deliverable when applying the relative selling price method. ASU 2009-13 shall be effective in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Companies may elect to adopt this guidance prospectively for all revenue arrangements entered into or materially modified after the date of adoption, or retrospectively for all periods presented. The Company will adopt this standard effective January 1, 2011.  The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.








F-26





In April 2010, the FASB issued Accounting Standards Update 2010-17 (ASU 2010-17), "Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition." The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.





Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.





NOTE R – SUBSEQUENT EVENTS





Common stock





On December 31, 2010, the Company had an aggregate of  908,010,135 common shares outstanding. In addition, the Company had 617,873,486 stock options outstanding. The total of the outstanding shares and the outstanding options exceeded the Company’s authorized capital of 1,500,000,000 common shares. During February 2011 a shareholder of the Company mutually terminated 500,000,000 options which were awarded in 2005.





During February 2011 a former officer of the Company returned 3,328,333 shares of common stock to the Company for no consideration. These shares were cancelled.





Royalty agreement





Effective January 1, 2011, the royalty agreement between Sparx, Inc. and the Company was cancelled (See Notes 1 and 2).




Employment Agreements





During February 2011 the Company’s Chairman of the Board of Directors, Carl Smith, resigned and his employment agreement was terminated. Additionally, the Company, by mutual agreement, cancelled the contracts of its President and Chief Financial Officer, although both remain employed by the Company.