UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC  20549





FORM 10-K /A




(Amendment No. 1)





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








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





For the Fiscal Year Ended December 31, 2011





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 May 18, 2012 was $63,401,688





Number of outstanding shares of the registrant's par value $0.001 common stock as of May 18, 2012 : 1,137,594,884











1





EXPLANATORY NOTE
 Sunovia Energy Technologies, Inc., is filing this Amendment No. 1 to its Annual Report on Form 10-K for the period ended December 31, 2011, as filed with the Securities and Exchange Commission on March 30, 2012, for the sole purpose of updating the patent list provided under Item 1 –Description of Business.  In addition, the outstanding shares and aggregate market value of voting stock held by non-affiliates on the cover page has been updated to May 18, 2012.
 
 No changes have been made to the Form 10-K other than as set forth above.  This amendment does not reflect subsequent events occurring after the original filing date of the Form 10-K or modify or update in any way the disclosures made in the Form 10-K.





SUNOVIA ENERGY TECHNOLOGIES, INC.





FORM 10-K


For the Fiscal Year Ended December 31, 2011











Part I
PageItem 1. Description of Business
3Item 1A. Risk Factors
9Item 1B. Unresolved Staff Comments
9Item 2. Properties
9Item 3. Legal Proceedings
9Item 4.  Mine Safety Procedures
9Part IIItem 5. Market for Registrant's Common Equity Related Stockholder Matters and Issuer Purchase of Securities
10Item 6. Selected Financial Data
11Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
11Item 7A. Quantitative and Qualitative Disclosures about Market Risk
17Item 8. Financial Statements and Supplementary Data
17Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
17Item 9A. Controls and Procedures
17Item 9B. Other Information
18Part IIIItem 10. Directors, Executive Officers and Corporate Governance
18Item 11. Executive Compensation
21Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
25Item 13. Certain Relationships and Related Transactions, and Director Independence
26Item 14. Principal Accounting Fees and Services
27Item 15 Exhibits, Financial Statement Schedules
28Signatures
29Financial Statements
F-1








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PART I




FORWARD-LOOKING INFORMATION





This Annual 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-Q, 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 subsidiary, EvoLucia, Inc. is in the business of designing, manufacturing, marketing and distributing light emitting diode (LED) lighting fixtures. Prior to 2011, the Company also developed energy-efficient technologies in solar energy and infrared. As discussed below, the Company has exited the solar and infrared businesses and currently focuses solely on LED lighting. The Company’s solar subsidiary, Sunovia Solar, Inc. has not had operations since June 2010 and is not anticipated to have operations in the foreseeable future.





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 that we sell directly to customers and through a network of manufacturer’s representatives in the U.S. and other countries. In addition, the Company has other lighting products that do not utilize the Aimed OpticsTM technology that complement the Company’s portfolio and provide lighting solutions for other areas, such as parking garages. We continue to develop and refine our products to serve the market and are actively pursuing alliances and strategies that will allow us to drive down the production cost of our products.




Solar and Infrared





For several years, the Company actively pursued and developed certain solar technologies and, with its venture partner in that business, also developed infrared technology. The solar business did not become commercially viable, however. Following a dispute with its partner in the solar business that arose in 2010 and was settled in  2011, we exited the solar business. At the same time, the Company exited the infrared business, as it relied heavily upon the relationship with the solar partner for future success. The Company retains certain rights to technologies developed through this alliance but does not intend to devote resources to either of these businesses in the foreseeable future.  See “MANAGEMENT’S DISCUSSION AND ANALYSIS.”







3







EvoLucia LED Lighting





EvoLucia, the Company’s wholly-owned LED lighting subsidiary, is currently 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). A report issued in January 2011 by Navigant Consulting, Inc. prepared for the Building Technologies Porgram of the Office of Energy Efficiency and Renewable Energy (EERE) of the Department of Energy estimates that there are 56.2 million roadway lights in the United States, including 26.5 million street lights and 26.1 million highway lights. The same report estimates approximately36.4 million parking garage lights and 15.8 million parking lot light fixtures installed in the United States. It is estimated that fewer than 5% of the parking light totals and fewer than 1% of the roadway and highway lights utilized LED technology. These markets, which are primary markets for the Company’s products, have the potential for explosive growth in LED replacements of existing technologies in the years ahead. Traditional lighting companies have been somewhat slow to develop LED technologies; however, the large lighting companies have acquired the technology either through acquisition or OEM and licensing arrangements with smaller LED lighting companies. 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, although high product costs have hampered sales of the cobrahead and shoebox products in certain markets.





EvoLucia completed the basic design for most of its products in 2009. However, the improvement in LED performance and the competitive pressures in the lighting industry drive the need to update product designs and performance in order to remain competitive. Also, in order for LED lighting to be fully competitive with traditional lighting, the cost of the products, which are currently higher than comparable traditional lighting fixtures must be competitive as well. This will require reductions in product cost through component price reductions and increasing manufacturing efficiencies. We anticipate that this cycle of modifications in product design to these ends will continue and the timeframes for developing new products will be compressed as competition in the industry grows.





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. In addition, as the LED lighting market continues to expand, the distribution efficiencies of the lighting market are likely to drive industry consolidation and product portfolio expansion as fixture companies compete for business across product lines.





LED Lighting Products





The Company currently produces and sells several products that provide LED lighting solutions for roadways and walkways, parking lots and garages and other area lighting solutions. In several product categories, the Company offers a number of standard products and will manufacture non-standard products of similar designs on a case-by-case basis. The Company’s standard product offerings are described in more detail below.





Roadway Lighting Products





The Company offers the following standard products for roadway lighting:





(i)
Cobra Head lights in 55-, 80- and 100-watt configurations and Type I, II and III distributions;


(ii)
120- and 150-watt Shoebox lights, Type II and Type III


(iii)
A 21” and a 28” decorative “Fairview “ light, a bell-shaped design that derived its name from the first installation in which it was used in Fairview, Texas; and


(iv)
a 60-watt decorative “Post Top” retrofit light.





Cobra head





Our cobra head utilizes our Aimed OpticsTM technology, which is subject to a pending patent application in the U.S. and certain foreign patent applications as well.  In 2011, our Cobra Head SCHX5 earned the award for Best Outdoor Street Light, in its class, by the U.S. Department of Energy, the International Association of Lighting Designers and the Illuminating Engineering Society in the 2010 Next Generation LuminairesTM Solid State Lighting Design Competition. The SCHX5 outperformed its competition with an industry-high Fitted Target Efficacy score of 57 putting the most footcandles on the ground, in the pattern required, with the best uniformity, using the fewest LEDs and the least power consumed. The FTE was developed by the Department of Energy for evaluating ENERGY STAR® outdoor roadway luminaire light performance. EvoLucia’s SCHX5 LED was the only outdoor roadway/ parking luminaire in that category recognized with an award. In addition, the SCHX5 LED was selected to be a product that the judging panel would recommend to lighting specifiers.





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.











4








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.





Shoebox





The Shoebox utilizes the same Aimed OpticsTM technology as the cobra head with a different housing.





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)





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.





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.




Distribution Channels





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 (North American Manufacturing Association) estimates that public utilities have installed and currently maintain in excess of 12.5 million cobra head street lights, and 9 million decorative post-top pedestrian-scale street lights in the U.S. 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/RFPs 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 and/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: 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. The Company has been successful in marketing its products to the U.S. military and has installed its lights on several military bases in the last two years. We continue to expand our capabilities in serving this market and expect this market to represent increasing sales in the future.








6





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.





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. In addition, several countries, including China and Mexico, have announced mandated transition to LED lighting. The international market presents additional challenges in addressing each country’s specific requirements and to arrange manufacturing and distribution sufficient to meet demand and to maintain quality. 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.





Dependence on Customers





During the fiscal year ended December 31, 2011, we had aggregate sales of $709,251 to 2 customers, compared to sales of $548,018 to 2 customers for the five-month period ended December 31, 2010 and $1,004,916 to 4 customers for the year ended July 31, 2010, which sales individually represented more than 10% of the Company’s net revenues. Also, as of December 31, 2011, 59% of net accounts receivable were due from 2 customers, compared to 34% of net account receivable from 1 customer as of the end of 2010.





In 2011, the Company solidified its OEM relationship with OSRAM Sylvania. Sales through that OEM channel resulting from this relationship were more than 10% of the Company’s totals in 2011. This relationship also represented more than 10% of the Company’s accounts receivable as of the end of the fiscal year 2011. While we anticipate continued growth in sales through this channel, we also anticipate growth in other distribution channels which would result in this relationship representing a smaller percentage of overall revenues and accounts receivable in the future.





PATENTS





The Company and its subsidiaries and affiliates have applied for and obtained a number of patents in various technologies, particularly LED lighting and solar technologies. The table below lists the Company’s LED lighting patents.





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
PendingLED Light Unit With Battery Back-up, Communications and Display
12/027,232
Feb. 6, 2008/ Feb. 6, 2007
IssuedLED Light Unit With Battery Back-up And Internal Switch State Detection
12/594,932
April 7, 2008/ April 6, 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
Pending








7





Foreign Applications (including PCT applications):





Title
Country
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





Need for Government Approval of Principal Products and Services





We do not require government approval to sell any of our products. However, in certain instances our customers may desire carbon and tax credits associated with the use of our products, which requires governmental approval.





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.





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. In the event we offer compact fluorescent lights for sale in the future, this may change, as there have been concerns raised regarding mercury pollution associated with CFLs.





Employees





As of March 27, 2012, we had 11 full-time employees. We have not experienced any work stoppages and consider relations with employees to be good.








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ITEM 1A. RISK FACTORS





As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item 1A. Risk Factors.





ITEM 1B. UNRESOLVED STAFF COMMENTS





As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item 1B. Unresolved Staff Comments.





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 months 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.





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





During 2010 and 2011, the Company was a party to a lawsuit arising out of its Research, Development and Supply Agreement with EPIR Technologies, Inc. (“EPIR”). The suit was brought by EPIR in August, 2010 and sought an unspecified amount of damages and other unspecified equitable relief. The litigation was settled in 2011 at no out-of-pocket cost to the Company, other than legal expenses incurred. EPIR returned approximately 69,000,000 shares of the Company’s common stock as part of the settlement, of which approximately 59,000,000 were cancelled. EPIR also cancelled an option to acquire 25,000,000 shares of common stock of the Company. The Company returned all of the shares of EPIR that it owned as part of the settlement. The lawsuit was dismissed with prejudice in the second quarter of 2011. The Company retains the right to a 50% share of any revenues recognized from the jointly-developed solar technology that results from its relationship with EPIR.





The Company paid no legal fees related to this litigation in fiscal year 2011. Certain legal fees charged in the litigation remain outstanding and are in dispute. The Company has pledged 9,700,000 shares of its common stock to secure any obligation it may have to pay any further legal fees related to this litigation.





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.  MINE SAFETY DISCLOSURES





Not applicable.








9








PART II





ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





Market Information





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 2011


Calendar 2010High


Low


High


LowFirst Quarter

$
.04


$
.02


$
.13


$
.09Second Quarter

$
.05


$
.02


$
.09


$
.05Third Quarter

$
.04


$
.02


$
.06


$
.03Fourth Quarter

$
.02


$
.02


$
.05


$
.02





Holders





As of March 26, 2012, 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. 15500 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760.





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





In the first quarter of 2011, the Company issued 99,999 shares of common stock to 3 employees for services rendered.





In the second quarter of 2011, the Company issued 1,093,300 shares to 6 employees for services rendered. In addition during that quarter 125,000 shares of common stock were issued to a former employee to correct an error in a stock option exercise from a prior period and 285,514 shares of common stock were issued upon exercise of outstanding stock options having an aggregate exercise price of $29.





In the third quarter of 2011, the Company issued  596,539 shares to 2 employees for services rendered; 200,000 shares to a director for services rendered; 200,000 to a consultant for services rendered; and 300,000 shares to 2 individuals upon exercise of outstanding stock options having an aggregate exercise price of $30.





In the fourth quarter of 2011, the Company issued 1,137,500 shares of common stock to 4 employees for services.





In the fourth quarter of 2011, the Company issued 33,750,000 to 10 accredited investors for $500,000 in cash and $175,000 in satisfaction of unpaid liabilities for compensation to the former CEO. An additional 1,400,000 shares is due to an employee in satisfaction of deferred compensation in the amount of $28,000.





In the fourth quarter of 2011, the Company issued 125,000 shares to correct an error in an issuance in a prior period.





In the first quarter of 2012, the Company issued 3,000,000 shares in satisfaction of an outstanding invoice to a professional service provider.





In the first quarter of 2012, the Company issued 142,960,000 shares to 24 accredited investors for $1,429,600 in cash and an additional 35,000,000 shares to 7 holders of convertible notes in conversion of $350,000 of principal on that debt.





In the first quarter of 2012, the Company issued 25,000,000 shares to a director who provided a working capital line of credit to the Company in the initial aggregate amount of $2,000,000.





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.




10







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 2011, the Company exited its solar and infrared business lines after concluding that those technologies would not yield valuable opportunities for profitable growth in the future given the Company’s cash flow constraints and the market factors at work in those businesses. During fiscal year 2011, the Company’s sole focus was its LED lighting business, which is its sole business at this time. See “Description of the Business.”





For the fiscal year ended December 31, 201, the Company had a net loss of $4,160,638, as compared to a net loss of $17,984,592 for the fiscal year ended December 31, 2010, or a decrease of $13,823,954 (77%). The decrease resulted from three primary areas: a reduction of approximately $4.2 million in selling, general and administrative expenses, a reduction in research and development expenses of approximately $3.6 million and a non-recurring impairment to the Company’s investment in EPIR of approximately $3.7 million in 2010. See “Other Income and Expenses”, below. The net loss from operations for the fiscal year ended December 31, 2011 was $4,190,917 as compared to a net loss from operations in the fiscal year ended December 31, 2010 of $13,110,027, or a decrease of 68%. The significant factors contributing to this operating loss are discussed in more detail below under “Results of Operations.”





Certain events occurring after the end of the fiscal year had a significant impact on the Company’s liquidity and cash available for operations. See “Subsequent Events”.





Results of Operations





In 2010, the Company changed its fiscal year from July 31 to December 31. Our audited financial statements for 2010 present the twelve-month period ending July 31, 2010 and the five-month period ending December 31, 2010. Also, in late 2009 and 2010, the Company incurred significant, non-recurring expenses related to the solar business, a business segment which the Company exited in 2010. For these reasons, the Company believes that a comparison of the fiscal year ended December 31, 2011 to the fiscal year ended December 31, 2010 is significantly more relevant to an understanding of its results of operations than comparisons to the twelve months ended July 31, 2010 and the five months ended December 31, 2010. The financial statements and notes thereto included herein present the three periods as audited, and we encourage you to review the financial statements and the notes thereto. The following information relating to the results of operations compares the twelve months ended December 31 for each of the two most recent years. You should note that the results of operations for the twelve months ended December 31, 2010 are not derived from audited financial statements for that period








11





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 fiscal years ending December 31, 2011 and December 31, 2010.





2011


2010 (unaudited)Sales

$
2,639,364


$
2,019,840Cost of Sales


2,157,198



2,637,753Selling, General & Administrative Expenses


4,543,258



8,541,391Research and Development Expenses


-0-



3,950,723Total Operating Costs and Expenses


4,543,258



12,492,114Operating Loss


(4,061,092
)


(13,110,027
)Impairment of Investment in EPIR


-



3,680,731Net Other Expense


99,546



1,193,834Net Loss

$
(4,160,638
)

$
(17,984,592
)





Revenues





Revenues for the fiscal year ended December 31, 2011 were $2,639,364, which represented an increase of approximately 31% from the prior year of $2,019,840. All of the Company’s sales in 2011 were sales of LED lighting products, and all of the increase in revenue was a result of sales of LED lighting fixtures.





A number of initiatives were begun in 2011 or continued from the prior year that contributed to the increases in sales for the year, in particular focusing efforts on markets where the Company or its representatives have existing relationships and projects where the Company’s products could be specified for a particular application. The Company also focused on universities and military installations having larger installations and the opportunity for follow-on orders.




Gross Profit





The Company had a gross profit of $482,166 (for a gross profit margin of 18.3% for the year ended December 31, 2011, as compared to a gross loss of $617,913 for the fiscal year ended December 31, 2010.  A number of factors contributed to this improvement in performance, particularly:





·
Reductions in cost of goods sold driven primarily by declining prices on certain components market-wide and improved sourcing of components, along with efficiencies in manufacturing processes.


·
Significant reductions in consulting and engineering expenses as several of the Company’s product designs were finalized in 2010 and prototyping expenses were reduced in the move to standardized products.


·
Reductions in virtually all overhead expense categories, which resulted from a focused effort to reduce expenses and improve profitability.





Costs of Goods Sold





Cost of Goods Sold (COGS) includes the costs of sale of our products, including material costs, manufacturing and labor, freight and shipping, warranty expense and sales commissions. COGS decreased 18% in fiscal year 2011 to $2,157,198 from $2,637,753 in fiscal year 2010. This decrease reflected manufacturing efficiencies and material cost savings through volume purchasing and decreasing costs of components. Sales commissions were essentially flat year to year.





Expenses





Total operating expenses were reduced by 63.6%, to $4,543,258 in fiscal year 2011 compared to $12,492,114 in 2010. Selling, general and Administrative expenses were reduced by 46.8% over the period, to $4,543,258 in 2011 from $8,541,391 in 2010.





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





Selling, General and Administrative Expenses





Selling, general and administrative expenses for 2011 were equal to total operating expenses, as the Company had no research and development expense in that period. The major components of Selling, General and Administrative Expenses are discussed below.








12





Product Development





Product development costs were $339,435 for the year ended December 31, 2011, compared to $3,249,670 for the year ending December 31, 2010, a decrease of approximately $2.9 million. The Company’s development of its existing products was completed in fiscal year 2010; product development costs in 2011 represented refining existing designs and development of the next generation cobrahead and shoebox products. In addition, the Company did not have sufficient capital from operating revenues or other sources to deveote significant additional resources to product development in 2011.





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 ended December 31, 2011 the Company’s general and administrative expenses were $4,173,063, compared to $8,541,391 in the prior year, an improvement of 51.1%. This improvement reflected the Company’s cost reduction measures and significant reductions in travel expenses, consulting services and professional fees, which declined primarily due to a decrease in legal fees. These measures were implemented in response to the Company’s focus on becoming profitable as quickly as possible and the need to preserve cash for operating expenses.





Marketing Costs





Marketing costs totaled $30,760 in fiscal year 2011, as compared to $38,351 in fiscal year 2010, representing a decrease of $7,591 or 19.8%.




Research and Development





The Company exited its solar and infrared businesses in 2010 and incurred no research and development expenses in 2011. In 2010, research and development expenses were $3,950,723. We do not anticipate incurring research and development expenses going forward.





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 December 31, 2011 was $99,546, compared to $71,920 of interest expense for the year ended December 31, 2010. The increase in interest expense resulting from the sale of $1,000,000 in convertible debentures in June of 2011 that were not outstanding in 2010.





Derivative losses - The Company had no derivative expense in 2011. We had derivative expense of $336,488  during fiscal year 2010 which related to the sale of convertible debentures in July 2010 in the principal amount of $1,000,000 that were settled for 64,516,127 shares in the third quarter of 2010.





Impairments – The Company had no impairment expense in 2011. In 2010, we recognized an impairment of $3,680,385 related to our investment in EPIR relating to the solar business.





Liquidity and Capital Resources





The Company’s cash flow from operations is insufficient to meet its current obligations. In fiscal year 2011, the Company relied upon additional investment through sales of common stock and debentures in order to fund its operations. For recent financing activities  See “Subsequent Events” below and Note P to the Financial Statements included elsewhere herein.





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, 2011, we had $235,878 in cash and cash equivalents. We had receivables, net of allowances, of $409,064 and inventory of $560,738 and our current liabilities were $2,892,332, of which $1,000,000 are convertible into common stock.





Our business cycle is working capital intensive. The sales cycle can be several months or longer and sales are not invoiced until the product has been built and shipped, requiring all cost of goods other than sales commissions to be incurred prior to payment on an order. 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.





As noted below, the Company accepted subscriptions for the sale of common stock in the aggregate amount of $__ million on March 29, 2011. At the same time, the Company was given a working capital line of credit by a private investor of $2 million. These funds, along with the restructuring of the Company’s liabilities discussed further below, provide sufficient working capital for the Company to continue its operations through fiscal year 2012. See “Subsequent Events” and Note P to the Financial Statements included herein.





The Company uses contract manufacturers to produce its products and therefore does not have significant capital expenditures at this time.






13





Operating Activities





Net cash used in operating activities for the year ended December 31, 2011 totaled $2,372,523, which included non-cash stock charges of $1,720,981.





Investing Activities





Net cash used in investing for the year ended December 31, 2011 was $20,964.





Financing Activities





Our net cash raised in financing activities for the fiscal year ended December 31, 2011 was $1,343,590, of which $1,000,000 resulted from the sale of convertible debentures and $500,071 resulted from the sale of common stock. In addition, the Company repaid short-term debt of $156,281 during 2011.





Cash Requirements





As of December 31, 2011, we had $235,858 in cash and cash equivalents. As discussed below, this is not adequate to maintain the Company’s current level of operations through December 31, 2012. However, subsequent events have significantly improved the Company’s cash position and ability to maintain its operations. See “Subsequent Events” below and Note P to the Financial Statements included herein.





Subsequent Events





On January 31, 2012, a restricted stock award on 1,000,000 shares of common stock was granted to an employee of the Company. This restricted stock award vests on a quarterly basis over a one-year period beginning June 30, 2012 as to 250,000 shares per quarter. The Company may, at its option, pay the award in cash in an amount equal to the number of vested shares times the greater of the average closing price of the Company’s common stock over the twenty trading days immediately prior to the vesting date or $.025.
 
 On February 16, 2012, the Company granted a stock option on 1,000,000 shares to an employee of the Company. This option has an exercise price of $.045 per share and vests as to 50% of the shares one-year after the date of grant and ratably per quarter for the following three years. This option has a term of 10 years.
 
 In March 2012, the Company issued 3,000,000 shares of its common stock in satisfaction of an outstanding invoice from a professional service provider.
 
 On March 28, 2012, the Company accepted subscriptions from 24 investors to purchase 142,960,000 shares of its common stock for an aggregate purchase price of $1,429,600. In addition, a private investor and shareholder of the Company has made available to the Company a working capital line of credit $2 million, which may be increased in the investor’s discretion. The working capital line may be drawn to purchase components for orders of the Company’s products approved by the lender. The working capital line bears interest at an annual rate of 12.5% and draws must be repaid within three business days of receipt of payment from the customer.
 
 In addition, holders of an aggregate of $700,000 in principal of the 9% convertible notes issued in 2011 (the “Convertible Notes”) have restructured their Convertible Notes by extending the maturity date to July 1, 2013. In connection with that extension, each of the holders who extended their Convertible Notes converted 50% of the principal amount of the Convertible Notes to common stock and the Company modified the terms of the remaining debt to allow conversion at $.02 per share and to increase the interest rate to 10% per annum. The aggregate principal amount outstanding under the new notes is $650,000. The Company will issue an aggregate of 35,000,000 shares of common stock to the holders of the Convertible Notes in the conversion of principal to common stock.
 
 At the same time, the Company restructured the 10% promissory notes issued in 2010 (the “2010 Notes”). The 2010 Notes are held by 8 individuals and have principal amounts outstanding ranging from $20,000 to $175,000. The principal outstanding on the 2010 Notes as of year-end 2011 was $672,687. As restructured, the new notes are held by 7 individuals, bear interest at 10%, and mature on July 1, 2013. In connection with this restructuring, $80,000 of the principal amount of the notes was paid to holders.




14





Recent Accounting Pronouncements





In June 2011, the FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income.  This Update amended the provisions of FASB ASC 220-10 by eliminating the option of reporting other comprehensive income in the statement of changes in stockholders’ equity.  Companies will have the option of presenting net income and other comprehensive income in a single, continuous statement of comprehensive income or presenting two separate but consecutive statements of net income and comprehensive income.  The new presentation requirements are effective for interim and annual periods beginning after December 15, 2011.  The adoption of this standard is not anticipated to have a material impact on our financial statements.





In September 2011, the FASB issued Accounting Standards Update 2011-08, Testing Goodwill for Impairment.  This Update amended the provisions of FASB ASC 350-20-35 by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit.  The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  The adoption of this standard is not anticipated to have a material impact on our financial statements.





The Company does not believe that other recently issued accounting pronouncements will have a material impact on its financial statements.








15








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





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.





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 be 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).





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.





16





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.





ITEM 7A. 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





In the lighting industry, prices of equivalent incandescent lighting products are lower than the Company’s prices. In addition, some competing LED lighting fixtures are priced lower than the Company’s products. Reducing the cost of our products is a primary focus at this time and will be necessary in order for our LED lighting products to be competitive in the marketplace in the future.




ITEM 8 . FINANCIAL STATEMENT AND SUPPLEMENTAL DATA









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





Not applicable.





ITEM 9A - CONTROLS AND PROCEDURES





Management Report on Disclosure Controls





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. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective and no material weaknesses had been identified.





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.







17




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.  In addition, the Company engaged a third party to conduct a review of its internal control and to test the effectiveness of its internal control over financial reporting. The consulting firm issued a report to the Board of Directors of the Company dated March 14, 2012 that concluded that the Company’s internal control over financial reporting were properly designed and operated effectively. The report also noted that the consultant did not identify any significant and/or material deficiencies in the course of its testing.





Based upon these analyses, the Company has concluded that its internal controls over financial reporting are properly designed and operate effectively and that there are not material deficiencies or weaknesses in the Company’s internal controls over financial reporting.




Changes in Internal Control over Financial Reporting





During the quarter ended December 31, 2011, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d–15(f) under the Exchange Act) that materially affected, or are 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 individuals who served as directors and executive officers during fiscal year 2011.





Name

Age

PositionArthur Buckland

63

Director, Acting Chairman of the Board and Chief Executive Officer and Acting Chief Financial OfficerErich Hofer

52

DirectorRobert A. Fugerer

53

Former Chief Technology OfficerThomas A. Siegfried

60

DirectorMatthew Veal



Chief Financial Officer





Mr. Buckland served as Acting Chief Financial Officer from May 20, 2011 through the end of the fiscal year, having taken that role upon the departure of the former Chief Financial Officer. Mr. Fugerer served as Chief Technology Officer until his resignation on August 24, 2011. Mr. Veal served as Chief Financial Officer until his resignation on May 20, 2011





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 served throughout 2011 as Chief Executive Officer and Acting Chairman of the Board of the Company. Also, after May 20, 2011, Mr. Buckland served as Acting Chief Financial Officer. 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 held a series of executive positions at Soliant Energy Inc. including Chairman, Chief Executive Officer and President.  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 and a Bachelors of Science from Syracuse University.





Robert Fugererserved asthe Company’s Chief Technology Officer until August 24, 2011.  Prior to joining the Company in 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.






18





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.








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.





2011 Board Meetings





During the fiscal year ended December 31, 2011, the Board formally met 11 times and took action by unanimous consent on 5 additional occasions. All of the directors attended each of the meetings of the Board in 2011.





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 2011. 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.





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;






19





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 year 2011. 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 year ended December 31, 2011, there was no failure to comply with Section 16(a) filing requirements applicable to its executive officers, directors or ten percent stockholders.





Director Compensation





The Company compensates outside directors on a negotiated basis including expenses for their service. Mr. Hofer has certain compensation and incentive arrangements with the Company that are described under "Employment Contracts and Consulting Agreements" below. Directors who are executive officers or employees of the Company 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.








20





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.





To the best of our knowledge, 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-based incentives such as stock options and stock-basedcompensation in certain cases. These equity-basedincentives align the interests of employees with those of shareholders and allow the employees to earn higher rates of income if the value of the Company improves over time. . The equity-based incentives also give the Company the ability to utilize less cash for compensation and still reward employees for performance improvements. Certain consultants have elected to be paid in shares only.





We do not work from any specified formula in setting compensation. Individual awards are based on a combination of factors, including current compensation level, the importance of the type of work performed to the Company’s overall goals, the relative degree of an individual’s shortfall between current compensation and market compensation for the particular job and executive management’s determination of the impact of the incentive level on performance. In 2011, we awarded options with terms of 10 years that vest over four years to provide longer-term incentives. All of our employees who served in 2011 who were not founders of the Company were granted stock options.





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 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. As of December 31, 2011, the Chief Executive Officer was the only employee with a current written employment agreement.





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, 2011 and the comparable period in 2010. For Messrs Fugerer and Vela, the table includes compensation information for the period from January 1, 2011 through the last date of employment (May 20, 2011 for Mr. Veal and August 24, 2011 for Mr. Fugerer).








21


Name and

principal

position

Year

Salary

($)

Bonus

($)

Stock

Awards

($)


Option Awards

($)


Non-Equity Incentive Plan

Compensation

($)


Nonqualified Deferred

Compensation Earnings

($)

All Other

Compensation

($)(2)

Total

($)Art Buckland

2011

$
300,000

-0-

-0-


-0-


-0-


-0-



$
300,000CEO

2010

$
76,697

-0-

-0-


$3,137,971
(1)

-0-


-0-




3,214,668Robert Fugerer

2011

$


-0-


-0-



-0-



-0-



-0-




$
169,891CTO

2010


150,000

-0-


-0-



-0-



-0-



-0-




$
169,977Matthew Veal

2011

$
100,000

-0-


-0-



-0-



-0-



-0-




$
113,470CFO

2010


100,000

-0-


-0-



-0-



-0-



-0-




$
110,298





(1)
Mr. Buckland was granted an option to purchase 72,000,000 shares of common stock at an exercise price of $.045 (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)
All other Compensation did not exceed $10,000 for any named executive in 2011 or 2010.











22





The following table sets forth 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:





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


22,500.000



49,500,0000



-0-


$
0.045


9/17/2020



49,500,000



-0-



-0-



-0-Former

CTO

Robert Fugerer


-0-



-0-



-0-



-0-



n/a



-0-



-0-



-0-



-0-











None of our executive officers exercised any stock option or stock-based incentive during 2011. The following table sets forth in tabular form 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, as required by SEC regulations:





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 Chief Technology Officer Robert  Fugerer


-0-



-0-



-0-



-0-Former Chief Financial Officer Matt Veal


-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:







23




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.  However, stock options granted under the Plan vest in the event of a change of control.





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.





Under terms of the Employment Agreement between the Company and Mr. Buckland, 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 Under the Agreement, 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. No bonus was paid to Mr. Buckland with respect to fiscal year 2010 or 2011.





Pursuant to the terms of his employment agreement, Mr. Buckland was granted 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.





Mr. Buckland’s employment terminated for strategic differences in January 2012. See “Subsequent Events.”






24








Robert Fugerer, Chief Technology Officer of the Company, served pursuant to an employment agreement, which provided 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 was terminated by the Company. In March of 2011, the Company and Mr. Fugerer mutually agreed to cancel Mr. Fugerer’s employment agreement. In August of 2011, Mr. Fugerer resigned from his employment with the Company.





Matthew Veal served as the Company’s Chief Financial Officer until his resignation on May 20, 2011. He did not seve pursuant to a written employment agreement during 2011.





On June 16, 2010, the Company entered into a three-year agreement with Erich Hofer, to serve as a director of the Company.  In consideration of the services to be rendered by him as a director, the Company agreed to pay Mr. Hofer a fee of $2,000 per month and issue him 200,000 shares of common stock of the Company per year. In October 2011, the Company granted a stock option to Mr. Hofer to acquire 4,500,000 shares of the Company’s common stock at the market value of the stock on that date ($.02 per share). This option vests over a four-year period in the same manner as options granted to employees (25% after one year and ratably per quarter thereafter for 3 years).





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. This Agreement terminated in 2011, and no compensation was paid pursuant to this Agreement to Mr. Hofer.





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. This Agreement terminated in 2011, and no compensation was paid pursuant to this Agreement to Mr. Hofer.





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.







25




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

4.96%Robert A. Fugerer**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock

50,395,408

5.68%Erich Hofer**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock

200,000

*%Arthur Buckland**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock

58,500,000 (3)

6.59%Matthew Veal**

106 Cattlemen Road

Sarasota, Florida 34232

Common Stock

270,000

*%All Officers and Directors

As a Group (5 persons)

Common Stock(3)(4)

153,365,408

17.28%


* 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 December 31, 2012 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 887,694,803  shares of common stock issued and outstanding as of March 27, 2012.


(3)
Includes 24 million shares of common stock subject to options exercisable within 60 days of December 31, 2012.





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





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.





During 2011, the Company engaged in the following transactions with executive officers and directors:





In June 2011, the Company sold 9% Convertible Promissory Notes to certain existing shareholders of the Company who were accredited investors. In connection with that offering, Mr. Buckland and certain members of his family purchased an aggregate of $200,000 in principal of those Convertible Notes. Mr. Buckland and his affiliates acquired the convertible notes on the same terms and subject to the same conditions as other purchasers of those notes.





In December 2011, the Company sold shares of its common stock to certain existing shareholders who were accredited investors at a price of $.02 per share. In connection with that offering, Mr. Buckland acquired shares having an aggregate purchase price of $200,000 for a combination of cash and extinguishment of an obligation of the Company to pay deferred salary.








26





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 services audit and other services to us during the fiscal periods indicated for the fees listed:





Fiscal year ended


Fiscal year endedDecember 31, 2011


December 31, 2010Audit fees

$
51,150


$
38,986Audit-related fees

$



$Tax fees

Nil


NilAll other fees

Nil


Nil





In addition, in 2010, the Company paid its former auditor $13,000 in audit fees.





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.







27







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 Agreement (5)10.2

Agreement between the Registrant and Carl Smith dated February 2, 2011(5)10.3

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 the Registrant (6)10.5

Stock Purchase Agreement between EPIR Technologies, Inc. and the Registrant dated January 24, 2008 (6)10.6

Sunovia Energy Technologies, Inc. 2008 Incentive Stock Plan dated May 1, 2008 (7)10.7

Common Stock Purchase Warrant between the Registrant and EPIR Technologies, Inc. dated April 15, 2009 (8)10.8

Amendment No. 1 to the Amended and Restated Research, Development, and Supply Agreement dated April 15, 2009 (8)10.9

Form of Secured Convertible Debenture dated June 15, 2009 (9)10.10

Form of Security Agreement dated June 15, 2009(9)10.11

Form of Subsidiary Guarantee dated June 15, 2009 (9)10.12

Form of Securities Purchase Agreement dated June 15, 2009(9)10.13

Form of Promissory Note December, 2009 and January, 2010 (10)10.14

Form of Promissory Note February, 2010 (10)10.15

Form of Subscription Agreement dated August 24, 2010 ($.02 per share) (11)10.16

Executive Employment Agreement between Arthur Buckland and the Registrant effective September 7, 2010 (12)10.17

Settlement Agreement between the Registrant and EPIR Technologies, Inc. (13)10.18

Form of 9% Convertible Promissory Note (14)10.19

Form of 10% Promissory Note10.20

Form of 10% Convertible Secured Promissory Note Due July 1, 201310.21

Consulting Agreement with VM5 Ventures, LLC31.1

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) of 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




EX-101.INS

XBRL INSTANCE DOCUMENTEX-101.SCH

XBRL TAXONOMY EXTENSION SCHEMA DOCUMENTEX-101.CAL

XBRL TAXONOMY EXTENSION CALCULATION LINKBASEEX-101.DEF

XBRL TAXONOMY EXTENSION DEFINITION LINKBASEEX-101.LAB

XBRL TAXONOMY EXTENSION LABELS LINKBASEEX-101.PRE

XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE


(1)
Incorporated by reference to the Current Report on Form 80K filed with the Securities and Exchange Commission on December 14, 2007


(2)
Incorporated by reference to the Quarterly Report on Form 10QSB filed with the Securities and Exchange Commission on December 21, 2007


(3)
Incorporated by reference to the Registration Statement on Form SB-2 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 Annual Report on Form 10-K for the Transition Period ended December 31, 2010 filed with the Securities and Exchange Commission on April 20, 2011.


(6)
Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2008.


(7)
Incorporated by reference to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on December 15, 2008


(8)
Incorporated by reference to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on March 16, 2009


(9)
Incorporated by reference to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 13, 2009


(10)
Incorporated by reference to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on March 22, 2010.


(11)
Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 24, 2010.


(12)
Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission in August 27, 2010.


(13)
Incorporated by reference to  the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2011.


(14)
Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2011.














28








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: May 18, 2012
By:
/s/ MEL INTERIANOMel InterianoChief Executive Officer (Principal Executive Officer)Date: May 18, 2012
By:
/s/ ERICH HOFERErich HoferChief 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/MEL INTERIANO

Chief Executive Officer

May 18, 2012Mel Interiano

(Principal Executive Officer)/s/ERICH HOFER

Chief Financial Officer (Principal Financial Officer and Principal Accounting

May 18, 2012Erich Hofer

Officer) and Treasurer/s/ FRANK SANTIAGO

Director

May 18, 2012Frank Santiago/s/THOMAS A. SIEGFRIED

Director

May 18, 2012Thomas A. Siegfried/s/BURTON SACK

Director

May 18, 2012Burton Sack





29








CONTENTS








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














F-1








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, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and of cash flows for the year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010.  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, 2011 and 2010, and the results of its operations and its cash flows for the year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010, in conformity with accounting principles generally accepted in the United States of America.





/s/ Kingery & Crouse, P.A.





Certified Public Accountants


Tampa, Florida


March  29, 2012








F-2


Sunovia Energy Technologies, Inc.


Consolidated Balance Sheets


December 31, 2011 and 2010


December 31, 2011


December 31, 2010ASSETSCurrent assets:Cash and cash equivalents

$
235,878


$
1,285,575Accounts receivable, net


409,064



491,740Inventory


560,738



653,307Prepaid expenses and other current assets


67,660



74,459Total current assets


1,273,340



2,505,081Property and equipment, at cost, net ofaccumulated depreciation of $596,473 and $458,269


92,024



209,264Other assets:Patents and other assets


123,008



151,918$
1,488,372


$
2,866,263LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)Current liabilities:Accounts payable and accruals

$
569,645


$
1,054,669Common stock redemption


650,000



650,000Convertible notes payable


1,000,000



-Current portion of notes payable


672,687



598,326Total current liabilities


2,892,332



2,302,995Long term portion of notes payable


-



230,642Stockholders' equity (deficit):Common stock, $0.001 par value,1,500,000,000 shares authorized,884,694,803 and 908,010,135shares issued and outstanding


884,695



908,010Additional paid-in capital


81,587,657



79,140,290Accumulated (deficit)


(83,841,837
)


(79,681,199
)(1,369,485
)


367,101Less: Treasury stock, at cost, 313,400 shares


(34,475
)


(34,475
)(1,403,960
)


332,626$
1,488,372


$
2,866,263


See the accompanying notes to the consolidated financial statements.
 
 
 F-3




Sunovia Energy Technologies, Inc.


Consolidated Statements of Operations


For the Year Ended December 31, 2011,
 the Five Months Ended December 31, 2010 and
 the Year Ended July 31, 2010


Year


Five Months


YearEnded


Ended


EndedDecember 31,


December 31,


July 31,2011


2010


2010Sales

$
2,639,364


$
1,067,903


$
1,587,418Cost of sales


2,157,198



1,218,407



1,785,467Gross profit (loss)


482,166



(150,504
)


(198,049
)Operating expenses:Research and development


-



-



7,145,723Selling, general and administrative expenses


4,543,258



3,705,448



7,783,7614,543,258



3,705,448



14,929,484Loss from operations


(4,061,092
)


(3,855,952
)


(15,127,533
)Other (Income) expense:Derivative loss


-



-



1,663,539Impairment of investment in EPIR


-



-



3,680,385Interest expense, net


99,546



42,384



47,09199,546



42,384



5,391,015Loss before income taxes


(4,160,638
)


(3,898,336
)


(20,518,548
)Income taxes


-



-



-Net loss

$
(4,160,638
)

$
(3,898,336
)

$
(20,518,548
)Per share information basic and diluted:Loss per share

$
(0.00
)

$
(0.00
)

$
(0.03
)Weighted average shares outstanding


876,793,343



882,023,545



666,469,427
  See the accompanying notes to the consolidated financial statements.
   F-4
  Sunovia Energy Technologies, Inc.
 Consolidated Statement of Stockholders' Equity (Deficit)


For the Year Ended July 31, 2010, the Five Months Ended December 31, 2010, and the Year Ended December 31, 2011




AdditionalCommon Stock


Paid-in


Accumulated


TreasuryShares


Amount


Capital


(Deficit)


Stock


TotalBalance 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
)


332,626Shares cancelled and retired


(63,284,162
)


(63,284
)


63,284



-



-



-Adjustment for shares issued in prior years


2,280,978



2,281



(2,281
)


-



-



-Exercise of options for cash


710,514



711



(640
)


-



-



71Shares issued for services


3,227,338



3,227



88,754



-



-



91,981Shares issued for cash


25,000,000



25,000



475,000



-



-



500,000Shares issued in satisfaction of accruals


8,750,000



8,750



194,250



-



-



203,000Stock options and warrants granted for services


-



-



1,629,000



-



-



1,629,000Net (loss) for the year


-



-



-



(4,160,638
)


-



(4,160,638
)Balance December 31, 2011


884,694,803


$
884,695


$
81,587,657


$
(83,841,837
)

$
(34,475
)

$
(1,403,960
)





See the accompanying notes to the consolidated financial statements.
   F-5
 Sunovia Energy Technologies, Inc.
 Consolidated Statements of Cash Flows
 For the year Ended December 31, 2011,
 the Five Months Ended December 31, 2010 and
 the Year Ended July 31, 2010


Year


Five Months


YearEnded


Ended


EndedDecember 31,


December 31,


July 31,2011


2010


2010Cash flows from operating activities:Net loss

$
(4,160,638
)

$
(3,898,336
)

$
(20,518,548
)Adjustments to reconcile net loss to netcash used in operating activities:Depreciation and amortization


167,114



107,400



214,172Impairment of investment in EPIR


-



-



3,680,385Provision for bad debts


20,898



25,000



10,111Non cash stock charges


1,720,981



1,574,830



11,093,461Change in fair value of derivative liability


-



-



16,642Changes in assets and liabilities:Accounts receivable


61,778



(294,656
)


(93,999
)Accounts receivable - related party


-



20,110



(20,110
)Inventory


92,569



291,451



(710,207
)Prepaid expenses and other current assets


6,799



(51,785
)


7,673Other assets


-



-



(1,930
)Accounts payable and accrued expenses


(282,024
)


(255,052
)


1,149,427Total adjustments


1,788,115



1,417,298



15,345,625Net cash (used in) operating activities


(2,372,523
)


(2,481,038
)


(5,172,923
)Cash flows from investing activities:Acquisition of property and equipment


(20,964
)


(7,988
)


(358,386
)Net cash (used in) investing activities


(20,964
)


(7,988
)


(358,386
)Cash flows from financing activities:Common shares issued for cash


500,071



2,593,087



4,075,360Proceeds from notes payable


-



122,642



706,326Repayment on notes payable


(156,281
)


-



-Proceeds from convertible debentures


1,000,000



-



1,500,000Net cash provided by financing activities


1,343,790



2,715,729



6,281,686Increase (decrease) in cash and cash equivalents


(1,049,697
)


226,703



750,377Cash and cash equivalents, beginning


1,285,575



1,058,872



308,495Cash and cash equivalents, ending

$
235,878


$
1,285,575


$
1,058,872Supplemental cash flow information:Cash paid for interest

$
73,290


$
42,421


$
37,208Cash paid for income taxes

$
-


$
-


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

$
-


$
1,200,000


$
1,000,000Issuance of common shares in satisfaction of accruals

$
203,000


$
143,500


$
820,390
  See the accompanying notes to the consolidated financial statements.


F-6





SUNOVIA ENERGY TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2011 and 2010








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 designing, manufacturing, marketing and selling energy-efficient light emitting diode (LED) lighting fixtures. The Company also previously developed technology in solar energy and infrared.   Through its wholly-owned subsidiary, EvoLucia, Inc., the Company develops and sells environmentally responsible lighting products that utilize energy-efficient LED technologies. The Company, through its wholly-owned subsidiary, Sunovia Solar, Inc., developed technologies in the solar energy arena designed to improve the efficiency of solar energy production and delivery.  The Company also developed mercury cadmium telluride infrared cells that increase efficiencies in infrared technology.





In March, 2008, the Company launched, EvoLucia, Inc. as its solid state lighting division. EvoLucia designs, patents, markets and distributes proprietary LED lighting fixtures through a number of channels, including strategic partnerships and energy solution providers.





Comparable Prior Period Information





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


Year Ended December 31, 2010:




Revenue

$
2,019,840Cost of goods sold

$
2,637,753Gross (loss)

$
(617,913
)Operating expenses

$
12,492,114(Loss) from operations

$
(13,110,027
)Other expenses

$
(4,874,565
)(Loss) before income taxes

$
(17,984,592
)Income taxes

$
-Net (loss)

$
(17,984,592
)Net (loss) per share

$
(0.02
)





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-7





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, 2011, substantially all of the Company’s cash was on deposit at a single financial institution.





Royalty Agreements





The Company entered into an agreement that required the payment of royalties to Sparx, Inc., a company owned by a former chief executive officer.  The agreement required the Company to expense royalties as product costs during the period in which the related revenues were recorded.  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 and E). The Company has no further obligations under this agreement.





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 $0 and $53,831 at December 31, 2011 and 2010.  Management has not charged interest on accounts receivable as of December 31, 2011.





Property and Equipment





Property 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-8





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 I). The balance of $100,000 represents the Company’s estimation of the value of a patent application related to solar technology. Under the terms of its settlement with EPIR, the Company is entitled to 50% of any revenue recognized through the sale or license of the jointly-developed 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, 2011 and 2010 of $123,008, and $143,008.  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.





Accounting for Derivative Instruments





Derivatives are required to be recorded on the balance sheet at fair value (see Note N).  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 from time to time which typically require a fee to be paid monthly or quarterly for services rendered.  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 year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010 totaled $11,052, $9,870 and $50,000.





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.







F-9




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


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, 2011, and 2010 and July 31, 2010 based on this methodology was 46,722,412, 545,833,486, and 543,005,924.





Inventory





Inventory consists of various electronic and other components used in the assembly of LED lighting fixtures.  Inventory is stated at the lower cost or market.  Cost is determined by the first-in, first-out (FIFO) method.





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 year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010.





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.






F-10





Fair Value of Financial Instruments





The Company’s financial instruments, including cash and cash equivalents, receivables, accounts payable and accrued liabilities and notes and debentures 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.





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, 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 N).  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 five months ended December 31, 2010 and the year ended July 31, 2010, have been reclassified in the comparative financial statements to be comparable to the presentation for the as of and for the period ended December 31, 2011.  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 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 provided for 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 E). 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 the Company’s founder. This option was mutually terminated in February 2011 (see Note M). The Company has no further or continuing obligation under the Royalty Agreement, and the option has been cancelled, with no party having any further rights to the option or any shares covered by it.





NOTE C - INCOME TAXES





The Company's net deferred tax asset as of December 31, 2011 and 2010 is as follows:





2011


2010Deferred tax assetNet operating loss carry forward

$
38,058,000


$
35,628,000Deferred tax asset


12,559,000



11,757,000Valuation allowance


(12,559,000
)


(11,757,000
)Net deferred tax asset

$
-


$
-





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





For the

Year


For the

Five Months


For the

YearEnded


Ended


EndedDecember 31, 2011


December31, 2010


July 31, 2010Federal income tax (benefit)at statutory rate

$
(683,000
)

$
(680,000
)

$
(4,336,000
)State taxes (benefit)


(122,000
)


(122,000
)


(770,000
)Valuation allowance


805,000



802,000



5,106,000Provision (benefit) for income taxes

$
-


$
-


$
-





The Company has reserved the entire balance of the loss carryforward at December 31, 2011, 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 primarily from stock compensation, derivative losses and research and development. The change in the valuation allowance was $805,000 during the year ended December 31, 2011.






F-11





The Company has not taken any uncertain tax positions on any of our open income tax returns filed through the period ended December 31, 2011. 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 2007.





NOTE D - PROPERTY AND EQUIPMENT, NET





At December 31, 2011 and 2010, property and equipment consisted of the following:





2011


2010Computer equipment

$
301,743


$
301,193Tooling


274,566



253,052Furniture and fixtures


48,060



48,060Leasehold improvements


64,678



64,678688,497



667,533Less: accumulated depreciation


(596,473
)


(458,269
)Furniture and equipment

$
92,024


$
209,264





Total depreciation and amortization expense for the year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010, was $138,204, $103,400, and $214,172.





NOTE E - STOCKHOLDERS' EQUITY (DEFICIT)





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 that may be required to be issued in connection with the redemption which is evidenced by an accrued liability of $650,000 at December 31, 2011 and 2010.





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 N. 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-12





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 due to a former officer aggregating $143,500 which approximated the fair value of the Company’s common shares (see Notes A and B).





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.





During the year ended December 31, 2011, the Company issued 25,000,000 shares of common stock for cash aggregating $500,000 and issued 710,514 shares of common stock pursuant to the exercise of options for cash aggregating $71.





During the year ended December 31, 2011, the Company issued 3,227,338 shares of common stock for services. The shares were valued at the trading price of the shares on the dates it was agreed that the shares would be issued which aggregated $91,981.





During the year ended December 31, 2011, the Company issued 8,750,000 shares of common stock in satisfaction of $175,000 of accrued salary due to an officer. In addition, the Company agreed to issue 1,400,000 shares of common stock to an employee in satisfaction of $28,000 of accrued salary. These shares have not been issued as of December 31, 2011. The value of the shares was the equivalent to the trading price of the Company’s common shares on the date that it was agreed that the shares would be issued.





Pursuant to a settlement agreement (see Note I) EPIR returned 59,405,829 shares of the Company’s common stock to the Company and the shares were cancelled.





During the year ended December 31, 2011, the Company cancelled 3,878,333 shares of common stock which were returned to the Company for no consideration. Of these shares 3,328,333 were returned by a former officer of the Company and 550,000 shares were returned by certain shareholders.





During the year ended December 31, 2011, the Company determined that an aggregate of 2,280,978 shares of common stock which had not been included in the outstanding share balances in previous years should have been considered as outstanding. This adjustment in the outstanding shares had no material effect on the Company’s financial statements.





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 year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010 totaled $125,340, $34,900 and $51,518.






F-13





Future minimum rental payments are as follows:




Year ended December 31,2012

$
83,5142013


87,8272014


92,4992015


100,4072016


8,367$
372,614





NOTE G - INVESTMENT IN EPIR TECHNOLOGIES, INC.





In 2008, the Company entered into a research, development and supply agreement (“the EPIR 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.





Consideration for the EPIR Agreement included exchanging 37,803,852 shares of the Company’s common stock for 20,220,000 (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 were to be split equally between EPIR and the Company.





The investment in EPIR was accounted for under the cost method of accounting because the Company did 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 evaluated 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 included 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 EPIR Agreement.  All payments to EPIR were to be used to cover operating expenses of EPIR towards the research, development and creation of the mass manufacturing processes for solar technologies. 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. 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 through March 1, 2010 were made by the Company either in cash or common stock.





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.





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.





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.





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.





The Company ceased making payments to EPIR effective with the June 1, 2010 payment (see Note I). The Company subsequently settled the dispute that arose with EPIR, and all of the Company’s obligations under the terms of that settlement have been met (see Note I).





NOTE H - 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 year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010 was $22,115, $17,881 and $68,283.






F-14





NOTE I - COMMITMENTS AND CONTINGENCIES





Litigation





EPIR





On May 12, 2011, the Company, EPIR Technologies, Inc. ("EPIR"), Sivananthan Laboratories, Inc. ("Labs") and Sivalingam Sivananthan entered into a settlement agreement settling litigation between them relating to the Company’s contract with EPIR to develop solar technologies. The parties have complied with the terms of the settlement, and all claims in the litigation have been dismissed.





The Company transferred, for no further consideration, 20,220,000 shares of EPIR common stock held by it (which was all of the shares of EPIR held by the Company) back to EPIR;





The Company transferred, for no further consideration, 20,200 shares of Labs common stock, which was all shares of Labs common stock held by the Company back to Labs;





EPIR transferred, for no further consideration,  69,105,829 shares of the Company’s common stock held by it back to the Company (which is all shares of common stock of the Company held by EPIR and of which 59,405,829 shares have been cancelled) and the balance of the shares are pledged to secure the Company’s obligation, if any, to pay invoices for legal fees billed related to the case, which totaled $471,000; and





EPIR delivered to the Company the original warrant for the purchase of 25,000,000 shares of the Company's common stock, for no further consideration, which warrant was cancelled.





In addition, the settlement provides that the Company and EPIR will share equally in the proceeds of a sale or license of the jointly developed solar patent. Pursuant to the terms of the settlement, the case was dismissed with prejudice on June 1, 2011.





As a result of the litigation the Company determined that a write down of its investment in EPIR was appropriate and reduced the carrying value to $100,000 which represents the Company’s estimate of the value of  the jointly developed solar patent.





Other





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.





NOTE J - RELATED PARTY TRANSACTIONS





Transactions with related parties during the year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010 include the royalty agreement discussed in note B, the equity issuances discussed in Note E, the consulting agreements discussed in Note L, the debt and note agreements discussed in Note N and the stock options discussed in Note O.





NOTE K - 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 year ended December 31, 2011, the five months ended December 31, 2010, and the year ended July 31, 2010, the Company made sales aggregating $709,251 to two customers, sales aggregating $548,018 to two customers, and sales aggregating $1,004,916 to four customers which sales individually represented in excess of 10% of the Company’s net revenues.





At December 31, 2011 and 2010, approximately 59% of net accounts receivable was due from two customers and 34% of net accounts receivable was due from one customer.






F-15





NOTE L - EMPLOYMENTCONTRACTS AND CONSULTING AGREEMENTS





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





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 (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. This Agreement terminated in June 2011.





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. This Agreement terminated in June 2011.





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.  Mr. Buckland and the Company entered into a written employment which provided, among other things, for an annual base salary of $300,000 and an option to acquire 72,000,000 shares of common stock of the Company at an exercise price of $.045 per share.  Mr. Buckland’s option vests over a four-year period with 25% of the shares vesting after one year (in September, 2011) and the remaining shares vesting ratably on a monthly basis thereafter. As of December 31, 2011, 22,500,000 shares of this option were vested. The employment agreement also provided for potential bonuses in certain circumstances in the discretion of the Company’s Board of Directors. No bonus was awarded under the employment agreement in 2010 or 2011.





Mr. Buckland’s employment terminated in January of 2012. At that time, Erich Hofer, a director of the Company, agreed to serve as chief executive officer on an interim basis. Mr. Hofer does not have a written employment agreement with the Company.





In December, 2011, the Board of Directors approved a consulting agreement with VM5 Ventures, LLC, a lighting industry consulting firm and its principal, Mel Interiano. Under this agreement, VM5 Ventures and Mr. Interiano are to provide strategic advice concerning sales, marketing and operations for the Company’s LED lighting products. The agreement provides for annual compensation of $400,000 and requires the consulting firm to contribute $10 million to the Company’s top-line revenue every six months.  In addition, the consulting firm is entitled to a stock option covering 50,000,000 shares at an exercise price equal to the fair market value of the Company’s common stock on the date of the grant. This option was granted in January 2012 and has an exercise price of $.02 per share.





NOTE M – 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.





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.






F-16





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





During the year ended December 31, 2011, the Company granted options to purchase 18,425,000 common shares at exercise prices of $0.02 to $0.03 per share for a period of ten years which vest over a five year period, to employees, consultants and officers. In addition the Company issued options to purchase 5,084,912 common shares at exercise prices of $0.02 to $0.07 per share for periods of three to four years which vest immediately, 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 1.0% to 3.0%, expected volatility of 153% and expected lives of 3 to 10 years.  No dividends were assumed in the calculations. The fair value of the options aggregated $643,297 of which $188,047 was charged to operations during the year ended December 31, 2011





During the year ended December 31, 2011, an aggregate of $1,440,953 was charged to operations related to options granted during prior years.





At December 31, 2011, there was an aggregate of $2,481,856 of unrecognized charges related to stock options which vest in future periods.





A summary of stock options is as follows:





December 31, 2011Outstanding




Weighted-AverageWeighted-Average


Aggregate

RemainingShares


Exercise Price


Intrinsic Value

Contractual LifeOptions outstanding atbeginning of year


617,873,486


$
0.097Options granted


23,509,912



0.033Options cancelled/exercised


(531,210,986)



0.100Outstanding at December 31, 2011


110,172,412


$
0.069


$
0.00

4.2 yearsExercisable at December 31, 2011


46,722,412


$
0.053


$
0.00

3.2 years








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





The unvested options vest as follows:





2012 – 29,129,167; 2013 – 22,650,000; 2014 and beyond – 16,670,833.




F-17





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, 2011 and 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, 2011 and 2010 and July 31, 2010. This amount will fluctuate based on the fair market value of the Company’s stock.





NOTE N – 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 (see Note E).





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.





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 an accredited investor (the “Investor”) pursuant to which the Investor 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.






F-18





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).





On June 10, 2011, the Company completed an offering of 9% Convertible Secured Promissory Notes (the “Convertible Notes”) in the aggregate principal amount of $1,000,000 to 10 existing shareholders ($300,000 to individuals who were officers or directors of the Company at the time the Convertible Notes were issued). The Convertible Notes bear interest at an annual rate of 9%. Interest on the Convertible Notes is accrued and payable on the earlier of conversion to common stock or the maturity date of the Convertible Notes. The Convertible Notes are secured by a lien on all of the assets of the Company. The Notes mature on July 1, 2012 and may be prepaid at any time without penalty upon ten days’ notice to the holders of the Convertible Notes.





The Convertible Notes are convertible on or after September 1, 2011 at a conversion price of $.06, which is 150% of the market value of the Company’s common stock, determined based upon the closing price of the Company’s common stock for the 20-day period beginning May 31, 2011 and ending June 20, 2011. The Company may require conversion of the Notes if the market value of the Company’s common stock exceeds 200% of the conversion price over a 20-day trading period, provided that a minimum trading volume of 50,000 shares per day exists during that time period.





By their original terms, these Convertible Notes may be converted into an aggregate of 16,666,667 shares of common stock.





Certain of the Convertible Notes were restructured in the first quarter of 2012. See Note P, Subsequent Events.





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.





During 2011 $156,281 of the debt was repaid and as of December 31, 2011, the aggregate balance outstanding on these notes was $672,687. These notes were restructured in the first quarter of 2012. See Note P, Subsequent Events.





NOTE O - RECENT ACCOUNTING PRONOUNCEMENTS





In June 2011, the FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income.  This Update amended the provisions of FASB ASC 220-10 by eliminating the option of reporting other comprehensive income in the statement of changes in stockholders’ equity.  Companies will have the option of presenting net income and other comprehensive income in a single, continuous statement of comprehensive income or presenting two separate but consecutive statements of net income and comprehensive income.  The new presentation requirements are effective for interim and annual periods beginning after December 15, 2011.  The adoption of this standard is not anticipated to have a material impact on our financial statements.





In September 2011, the FASB issued Accounting Standards Update 2011-08, Testing Goodwill for Impairment.  This Update amended the provisions of FASB ASC 350-20-35 by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit.  The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  The adoption of this standard is not anticipated to have a material impact on our financial statements.





The Company does not believe that other recently issued accounting pronouncements will have a material impact on its financial statements.





NOTE P – SUBSEQUENT EVENTS





On January 31, 2012, a restricted stock award on 1,000,000 shares of common stock was granted to an employee of the Company. This restricted stock award vests on a quarterly basis over a one-year period beginning June 30, 2012 as to 250,000 shares per quarter. The Company may, at its option, pay the award in cash in an amount equal to the number of vested shares times the greater of the average closing price of the Company’s common stock over the twenty trading days immediately prior to the vesting date or $.025.





On February 16, 2012, the Company granted a stock option on 1,000,000 shares to an employee of the Company. This option has an exercise price of $.045 per share and vests as to 50% of the shares one-year after the date of grant and ratably per quarter for the following three years. This option has a term of 10 years.






F-19





In March 2012, the Company issued 3,000,000 shares of its common stock in satisfaction of an outstanding invoice from a professional service provider.





On March 28, 2012, the Company accepted subscriptions from 24 investors to purchase 142,960,000 shares of its common stock for an aggregate purchase price of $1,429,600. In addition, a private investor and shareholder of the Company has made available to the Company a working capital line of credit $2 million, which may be increased in the investor’s discretion. The working capital line may be drawn to purchase components for orders of the Company’s products approved by the lender.  The working capital line bears interest at an annual rate of 12.5% and draws must be repaid within three business days of receipt of payment from the customer.





In addition, holders of an aggregate of $700,000 in principal of the 9% convertible notes issued in 2011 (the “Convertible Notes”) have restructured their Convertible Notes by extending the maturity date to July 1, 2013. In connection with that extension, each of the holders who extended their Convertible Notes converted 50% of the principal amount of the Convertible Notes to common stock and the Company modified the terms of the remaining debt to allow conversion at $.02 per share and to increase the interest rate to 10% per annum. The aggregate principal amount outstanding under the new notes is $650,000. The Company will issue an aggregate of 35,000,000 shares of common stock to the holders of the Convertible Notes in the conversion of principal to common stock.





At the same time, the Company restructured the 10% promissory notes issued in 2010 (the “2010 Notes”). The 2010 Notes are held by 8 individuals and have principal amounts outstanding ranging from $20,000 to $175,000. The principal outstanding on the 2010 Notes as of year-end 2011 was $672,687. As restructured, the new notes are held by 7 individuals, bear interest at 10%, and mature on July 1, 2013. In connection with this restructuring, $80,000 of the principal amount of the notes was paid to holders.