ITEM 1.
DESCRIPTION OF BUSINESS.
(a)
General Business development.
We were originally organized under the laws of the State of Nevada in 1996 as Zacman Enterprises, Inc. and subsequently changed our name to eNutrition, Inc.
On May 17, 2002, our stockholders approved our acquisition of all of the issued and outstanding securities of Torpedo Delaware in exchange for 8,000,000 shares of our common stock issued to the Torpedo USA stockholders.
On February 1, 2005, we acquired all of the issued and outstanding common stock of Interactive Games, Inc. (“Interactive”). In conjunction with the Interactive agreement, we changed our name to Interactive Games, Inc. and approved an increase in our authorized common stock from 50,000,000 shares to 100,000,000 shares. The acquisition of Interactive by us was accounted for as a reverse merger because on a post-merger basis, the former Interactive shareholders held a majority of the outstanding common stock of our company on a voting and fully diluted basis. As a result, Interactive was deemed to be the acquirer for accounting purposes.
In June 2007, our stockholders, through a written consent executed by stockholders holding a majority of the outstanding shares of our common stock entitled to vote, adopted and approved Amended and Restated Articles of Incorporation and ratified the Amended and Restated Bylaws of the Company, which were adopted by our board of directors on June 26, 2007. The Amended and Restated Articles of Incorporation increased the authorized capital stock of the Company from 105,000,000 shares to 500,000,000 shares, of which 25,000,000 shares now may be preferred stock having the voting powers, designations, preferences, limitations, restrictions and relative rights as determined by the board of directors from time to time. The Company’s stockholders also authorized our chief executive officer to change our name to China Nuvo Solar Energy, Inc. at such time as the chief executive officer deemed appropriate in his sole discretion.
Pursuant to an Agreement and Plan of Reorganization dated as of April 23, 2007, as amended on July 25, 2007 (the “Share Exchange Agreement”), by and between the Company and Nuvo Solar Energy, Inc., a Colorado corporation (“Nuvo”), we and Nuvo entered into a share exchange whereby all of the issued and outstanding capital stock of Nuvo, on a fully-diluted basis, was exchanged for like securities of the Company, and whereby Nuvo became our wholly owned subsidiary (the “Share Exchange”). The Share Exchange was effective as of July 25, 2007, upon the completed filing of Articles of Exchange with the Nevada Secretary of State and a Statement of Share Exchange with the Colorado Secretary of State. Contemporaneously with the Share Exchange, we changed our name to “China Nuvo Solar Energy, Inc.”
Immediately prior to the effective time of the Share Exchange, Nuvo had outstanding 5,500,000 shares of its common stock (“Nuvo Common Stock”) and no shares of preferred stock. In accordance with the Share Exchange Agreement, each share of Nuvo Common Stock was acquired by us in exchange for approximately 24.24 shares of our common stock for a total of 133,333,255 shares issued. Accordingly, after giving effect to the Share Exchange, the Company had approximately 189,915,355 shares of Common Stock outstanding immediately following the transaction.
As a result of the Share Exchange, the former Nuvo shareholders together held approximately 66.6% of the Company’s outstanding common stock immediately following the transaction, on a fully-diluted basis. Accordingly, the Share Exchange constituted a change of control of the Company. As a result of the Share Exchange, Nuvo constituted the accounting acquirer in the Share Exchange; however, we elected to have a July 31 fiscal year end, which is the same fiscal year end that Interactive Games, Inc. had prior to the Share Exchange.
On June 9, 2006, Nuvo signed a license agreement with Photovoltaics.com, Inc. (“PV”), which is based in Hutchinson Island, Florida. Nuvo acquired exclusive worldwide rights to PV's solar cell technology relating to a multiple stacked solar cell using wave guide transfers. This license agreement includes all patents issued pursuant to certain patents applications or amendments that have been filed and the rights to use all applicable copyrights, trademarks and related intellectual property obtained on or in connection with the process and products. On January 23, 2008, we purchased from PV the patent filings related to our solar technology in exchange for 2,000,000 restricted shares of our common stock. We now own all rights, title and interest in any patents that are subsequently issued or other intellectual property. On December 10, 2008 we executed a Patent and Trademark Purchase Agreement (the “Purchase Agreement”) with Photovoltaics, Inc. Through this agreement we acquired certain issued patents, patent rights and trademarks in exchange for $39,900 paid in installments from December 2008 through July 2009.
On September 1, 2011, the Company entered into and consummated the First Amendment to the Agreement Concerning that Exchange of Securities (the “Share Exchange Agreement”) with SurgLine, Inc., a Nevada corporation (“SurgLine”) and the shareholders of SurgLine. Upon consummation of the transactions set forth in the Agreement (the “Closing”), the Company adopted the business plan of SurgLine.
Pursuant to the Agreement, we agreed to acquire all of the outstanding capital stock of SurgLine in exchange (the “Share Exchange”) for the original issuance of an aggregate of 857,143 shares (the “Exchange Shares”) of the Registrant’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). The Exchange Shares will be issued on a pro rata basis, on the basis of the shares held by such security holders of SurgLine at the time of the Exchange. Further in accordance with the Agreement, and following an amendment of the Registrant’s Articles of Incorporation, the Exchange Shares were converted into 3,817,554,433 shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) equal to 70% of the issued and outstanding Common Stock of the Registrant. Additionally, pursuant to the provisions of the Share Exchange Agreement, the Company issued 163,609,476 restricted shares of Common Stock to the SurgLine shareholders, in satisfaction of the anti dilution provisions in the Share Exchange Agreement. As a result of the Share Exchange, the Registrant issued a total of 3,981,163,909 shares of its common stock to the SurgLine shareholders and SurgLine became a wholly-owned subsidiary of the Registrant.
On September 1, 2011, holders of a majority of the Company’s outstanding Common Stock approved an amendment to the Registrant’s Articles of Incorporation to increase the number of its authorized shares of capital stock from 1,500,000,000 shares to 6,500,000,000 par value $0.001 shares (the “Amendment”) of which (a) 6,475,000,000 shares were designated as Common Stock and (b) 25,000,000 shares were designated as blank check preferred stock.
At the effective time of the Exchange, our board of directors and officers was reconstituted by the resignation of Henry Fong as President and Chief Executive Officer of the Company and the appointment of Thomas G. Toland as a member of the Company’s Board of Directors, President and Chief Executive Officer and Richard Dutch as Secretary and Chief Operating Officer of the Company.
(b)
Financial information about segments.
Through July 31, 2011, we operated in only one industry segment.
(c)
Narrative description of business.
As of the period reported, we are a development-stage company that is working to develop and design, with a view toward manufacturing, solar photovoltaic (PV) cell technology products. We own certain patent applications and patent rights and other photovoltaic intellectual property. Our primary technology involves a unique patent pending solar cell technology based on photovoltaic cells with integral light-transmitting wave guides in a ceramic sleeve. The advantage of this technology is that less exposed surface area is required to generate electricity. The light-transmitting particles act as wave guides and allow the sun-exposed conversion area of the solar cell to be shifted readily from horizontal to vertical to capture more sunlight. The ceramic sleeve eliminates the need for expensive vacuum chambers, thereby allowing less expensive materials to be used in solar cell production.
We were working to develop, with plans to eventually manufacture and market in conjunction with strategic partners, innovative solar cells and solar power products for a wide range of applications based on our technology that increases light-trapping while enabling a variety of materials to be used. Our primary technology employs multiple stacked solar cells in a ceramic sleeve that uses nano-particles and crystal wave guides to carry light from the opening down to the last junction in the solar cell. Competitors’ processes that use vacuum chambers (instead of a ceramic sleeve) generally don’t allow for material substitution because of contamination issues. We believe our primary technology also will allow manufacturers to quickly and economically shift to new materials if a shortage of any one type of material occurs. We believe our technology will offer a flexible, cost-effective solution for increased light-trapping and therefore increased efficiency.
Our business plan focused on developing cost-effective, highly-efficient, environmentally-friendly solar energy products. We plan to enter into strategic partnerships with companies that can help advance our technology and may also acquire technologies and businesses that will help us implement our business strategy in certain circumstances. In order to do so, we must develop working prototypes that can be readily adapted to larger scale production and manufacturing. To date we have not developed any prototypes and do not have any strategic working relationships to further our business plan.
In an attempt to minimize the start-up costs of solar cell manufacturing, we signed an agreement with PMI to establish a pilot production line by building out and modifying PMI’s existing manufacturing facility located in the Chengdu West High Tech Development Zone in Chengdu, Sichuan, China. Following a serious earthquake in the Chengdu, China region, Pioneer ceased performing under the contract.
During the past year, the Company searched for a U.S.-based technology advisor or chief technology officer to assist the Company with the development of its photovoltaic intellectual property. The Company believes that if the technology can be proven effective utilizing a production ready prototype, it will be able to attract a strategic partner to assist in the development of production and manufacturing activities. However, the Company has not been successful in finding a candidate, and therefore has made no progress in developing any prototype. The Company believes there is little likelihood in developing a prototype.
Our Technology
The science used in our primary solar cell technology is based on an invention entitled, “Photovoltaic cell with integral light transmitting waveguide in a ceramic sleeve”, and utilizes Cadmium/Tellurium Cadmium/Sulfide powders layered in a ceramic sleeve with a copper back contact. The solar cell can utilize a variety of materials in powdered form layered in a ceramic sleeve with a conductive metal back contact. The ceramic sleeve eliminates the need for vacuum chambers or a vat with a molten material. A removable lens is clamped on to the cell. By having a removable lens, we are able to repair or add materials to the cell if necessary unlike existing technology. The cell utilizes a wave guide to carry light through the cell. In addition, the wave guide can photo generate an electrical potential in the cell. The material and amount of layers determines voltage while amperage is dependent in part upon particle size. In essence, a multiple stacked solar cell using a wave guide transfers the square conversion area of the solar cell exposed to the sun from the horizontal to the vertical.
Our patent pending technology incorporates a process that is conducive to manufacturing using a batch process. This is possible because the solar cell cylinder itself replaces the necessity to use expensive vacuum chambers during production. We believe this approach is the most expeditious and cost-effective alternative to development of manufacturing capability.
Our technology uses a ceramic sleeve as a receptacle for the various materials used for a solar cell. The ceramic sleeve replaces typical equipment such as expensive vacuum chambers thereby permitting the interchangeability of materials. Production processes using a vacuum chamber in many cases cannot interchange materials because of contamination issues. We believe that by utilizing the technology, if a shortage of one type of material occurs, a shift can be made quickly and economically to a more cost effective but complementary material. The materials that can be used in these cells goes from soft materials like Cadmium/Tellurium to hard materials like Silicon.
A published independent report by the Joannopoulos Research Group at the Massachusetts Institute of Technology (“MIT”) determined that light trapping by wave guides they put into photovoltaic cells was increased by 37%. This was accomplished by placing clear crystal particles as waveguides within the solar cell’s layered or stacked semiconductor materials. We believe our technology offers a number of significant advantages in light trapping efficiencies and certain production economies compared to current technologies. We believe our technology can increase light trapping even further than the MIT method by inter-dispersing these clear crystal particles in a random manner. In addition, these wave guides allow even more layers of photovoltaic materials to be put down. The wave guides bring the light down even further than the few microns it can now travel in most materials. We believe these ceramic sleeve solar cells with wave guides lend themselves to ideal cells for use in a concentrator system and other specialty applications.
How it works
Our photovoltaic cells consist of:
·
An initial semiconductor layer, comprised of N type semiconductor1 material having a top surface and a bottom surface. Light-transmitting particles are interspersed within the N type semiconductor material; and
·
A second semiconductor layer, consisting of P type semiconductor material having a top surface and a bottom surface. Light-transmitting particles are interspersed within the P type semiconductor material. The top surface of the second layer is in direct physical and electrical contact with the bottom surface of the first layer to form an N-P junction2.
The generation of electrical current from the lower N-P junctions of a stacked multi-layer photovoltaic cell results from the transmission of light through each semiconductor layer to the lower semiconductor layers. As a result, photovoltaic cells are produced which exhibit greater current-generating capacity for a given surface area of sunlight exposure.
The technology utilizes light-transmitting materials reduced to a powder form, typically through grinding the material to a size of 5 micrometers to 150 micrometers, followed by a further reduction in the particle size to 400 to 800 nanometers.
A wave guide carries light through the cell. This is achieved by exciting metallic structures that cause the conduction electrons to oscillate. Conduction electrons improve the absorption and emission of light from thin planar semiconductor layers by coupling the light with the wave guide modes of the semiconductor layer. Enhancing absorption through the use of conduction electrons also avoids the increase in surface recombination that occurs with conventional light-trapping methods.
The wave guide mode concentrates electrical potential in the cell. The material and amount of layers determines voltage while amperage is determined by particle size. The multiple stacked solar cell and wave guide mode enables sunlight- exposed conversion areas to be maximized by shifting the orientation from horizontal to vertical.
In addition, the technology enables PV cells to be packaged in any desired physical shape and with a reduced overall surface area such as cubes or elongated tubular structures designed to fit within specific size and shape constraints. This design flexibility greatly reduces the difficulty and costs of shipping, storing, deploying, and securing large solar module arrays.
During the fiscal year 2009, we acquired additional patents and provisional patents that we believe may further increase the efficiency and lower the cost of our primary wave guide photovoltaic technology as well as currently available technology.
Industry Information
Energy demand
Electricity consumption is strongly influenced by economic and population growth in the world’s developing economies. Demand for electrical power is projected to increase significantly over the next several decades. Demand increases may be most dramatic in developing countries where some two billion people still lack access to electricity, and addressing that issue is a high public priority.
With the world population growing at a rate currently estimated at 1.8% annually from an estimated 6.7 billion currently to 8.9 billion by 2050, energy demand will also increase substantially. Population growth and rising standards of living in developing countries should drive an increase in energy demand over the next few decades. The US Department of Energy predicts world energy consumption will grow roughly 70% by 2030.
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1 Semiconductors are typically categorized into either N-type or P-type semiconductors.
2 www.freshpatents.com/Photovoltaic-cell-with-integral-light-transmitting-waveguide-in-a-ceramic-sleeve-dt20070920ptan20070215201.php.
The US Energy Information Administration is predicting that US solar thermal and solar photovoltaic installed net summer generating capacity will increase to nearly 400 megawatts by the year 2030.
Solar energy industry trends
Solar energy offers a clean, safe alternative to energy produced from coal, oil or natural gas. Electricity is produced at low variable costs and solar energy plants don’t emit carbon dioxide. Despite these advantages, solar energy currently accounts for only a small fraction of the world's energy usage. Solar photovoltaic installations worldwide reached a record high of 3,800 megawatts in 2007. According to published reports, in 2007 grid-connected photovoltaic electricity was the fastest growing energy source, with installations of all photovoltaics increasing by 83% in 2009 to bring the total installed capacity to 15 GW.
With government support in more than 40 markets, end-user demand for solar power significantly exceeds production capacity. Germany, Japan and the US are the largest photovoltaic markets. Solar cell production increased by 50% in 2007, to 3,800 megawatts, and has been doubling every two years. Nearly half of the increase was in Germany, now the world's largest consumer of photovoltaic electricity (followed by Japan).
Silicon Supplies
Silicon is the basic material used in the production of solar cells based on crystalline technology, which account for a vast majority of the world market. During the mid 2000's silicon usage increased from 14,000 tons in 2004 to 19,000 tons in 2006 and silicon prices rose with demand. While prices have fallen and silicon supplies have increased, future silicon shortages and rising prices would compress the margins of solar cell manufacturers who rely on poly-silicon semiconductor materials, despite strong demand for solar photovoltaics. Because CNUV’s solar cell technology can use a variety of materials, the Company would not be impacted by potential silicon shortages and might actually benefit from market share gains made at the expense of higher- cost solar cell manufacturers if it were to reach production.
Competition
Companies pursuing similar technologies including different but related fields represent substantial competition. Many of these organizations are some of the largest companies in the world and have substantially greater capital resources, research and development staffs and facilities, as well as greater manufacturing and marketing capabilities than we do. These organizations also compete with Nuvo to attract qualified personnel, parties for acquisitions, joint ventures or other collaborations. As a result, there is no assurance that our technology will prove viable or that it will be able to compete with these larger organizations to produce any product or service.
Government Regulation
The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as internal policies and regulations promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are being modified and may continue to be modified. We will also be required to comply with all foreign, federal, state and local regulations regarding protection of the environment.
Compliance with Environmental Laws
We are required to comply with all foreign, federal, state and local regulations regarding protection of the environment. If more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. We may need to procure certain governmental and other permits to conduct our business. If we fail to comply with present or future environmental regulations, however, we may be required to pay substantial fines, suspend future production or cease operations. The manufacture of our potential products may use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes. Any failure by us to control the use of, or to restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations. In addition, under some foreign, federal and state statutes and regulations, a governmental agency may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release or otherwise at fault.
Employees
The Company currently does not have any full or part-time employees other than its officers.
ITEM 1A.
ITEM 1A.
RISK FACTORS
In General. The purchase of shares of our common stock is very speculative and involves a very high degree of risk. An investment in us is suitable only for the persons who can afford the loss of their entire investment. Accordingly, investors should carefully consider the following risk factors, as well as other information set forth herein, in making an investment decision with respect to securities of the Company.
The market price of our common stock may fluctuate significantly.
The market price of our common shares may fluctuate significantly in response to factors, some of which are beyond our control, such as:
·
the announcement of new products or product enhancements by us or our competitors;
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developments concerning intellectual property rights and regulatory approvals;
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quarterly variations in our and our competitors’ product development activities or results of operations;
·
changes in earnings estimates or recommendations by securities analysts;
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developments in our industry; and
·
general market conditions and other factors, including factors unrelated to our own operating performance.
Further, the stock market in general has recently experienced extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our common shares, which could cause a decline in the value of our common shares. You should also be aware that price volatility might be worse if the trading volume of our common shares is low.
Because we gained access to the public markets through a share exchange, we may not be able to attract the attention of major brokerage firms.
Additional risks may exist since we gained access to the public markets through a share exchange. Security analysts of major brokerage firms may not cover us since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on our behalf in the future.
Trading of our common stock is limited.
Trading of our common stock is on the Over-the-Counter Quotation Board, or “OTCQB” This has adversely effected the liquidity of our securities, not only in terms of the number of securities that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts' and the media's coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.
Because it is a “penny stock,” it will be more difficult for you to sell shares of our common stock.
Our common stock is a “penny stock.” Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain the purchaser’s written agreement to the purchase. The penny stock rules may make it difficult for you to sell your shares of our stock. Because of the rules, there is less trading in penny stocks. Also, many brokers choose not to participate in penny-stock transactions. Accordingly, you may not always be able to resell shares of our common stock publicly at times and prices that you feel are appropriate.
Risks Related to Our Business
We currently have no product revenues and will need to raise additional capital to operate our business.
To date, we have generated minimal product revenues. Until we are able to prove that our proprietary solar technology will work on a large commercial scale and can set up adequate manufacturing facilities ourselves or find a strategic partner to do so for us, we will not have product revenues. Therefore, for the foreseeable future, we will have to fund all of our operations and capital expenditures from additional financing, which may not be available on favorable terms, if at all. If we are unable to raise additional funds on acceptable terms, or at all, we may be unable to complete the development of our solar technology and set up adequate manufacturing facilities to produce a commercially viable product. In addition, we could be forced to discontinue product development at any time. Any additional sources of financing will likely involve the sale of our equity securities or issuance of debt instruments that may be convertible into our common stock, which could have a substantial dilutive effect on our stockholders.
We are not currently profitable and may never become profitable.
We have a history of losses and expect to incur substantial losses and negative operating cash flow for the foreseeable future, and we may never achieve or maintain profitability. Even if we succeed in developing and commercializing one or more products, we expect to incur substantial losses for the foreseeable future and may never become profitable. We also expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we continue to undertake research and development of potential alternative energy sources.
We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. As a result, we will need to generate significant revenues in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Our failure to achieve or maintain profitability could negatively impact the value of our stock.
We have a lack of operating history in which to base an investment decision.
We are a relatively new company that has a very limited operating history. Our acquisition of solar cell technology provides us with an opportunity for new business development, which carries continued unique risks inherent with any new business opportunity. As a relatively new company, Nuvo is subject to unforeseen costs, expenses, problems and difficulties inherent in new business ventures.
Our operations to date have been limited to organizing the company, acquiring and securing the proprietary technology, and limited product development. These operations provide a limited basis for you to assess our ability to commercialize any product and the advisability of investing in our securities.
No assurance of success or profitability.
We have no current business operations and expect to incur significant losses and negative operating cash flow for the foreseeable future, and we may never achieve or maintain profitability. Even if we succeed in developing and commercializing one or more products, we expect to incur losses for the foreseeable future and may never become profitable.
We currently have outstanding debt that is convertible into shares of our common stock at prices that may be significantly below the market price at any given time and therefore significant dilution could occur to our current stockholders.
At July 31, 2011, we had a total of $591,500 in debt that is convertible into shares of our common stock at discount of up to 50% of the market price for our common stock at any given time. The conversion of any or all of this debt could result in significant dilution to our stockholders at the time such debt is converted.
We currently have stock options and common stock purchase warrants outstanding that may be exercisable at prices below the market price for our common stock at any given time that could result in significant dilution to our stockholders.
At July 31, 2011, we had a total of 17,500,000 stock options and common stock purchase warrants outstanding exercisable at a weighted average exercise price of $0.04 at that date. The conversion of any or all of these options and warrants could occur at prices below the market price of our common stock at a given time and could cause substantial dilution to our stockholders. In addition, as we seek to raise additional capital to fund our future business operations, we could issue additional stock options and warrants at prices below market that cause additional dilution to our stockholders.
We may fail to successfully bring to market products based on our technology, which may prevent us from achieving product sales and market share.
We had expected to derive a substantial portion of our revenues from sales of new solar power products that were under development, however we have not successfully developed any new solar power products or technologies, we will likely be unable to recover the losses we incurred to develop these products and technologies and have been unable to establish our sales and market share and become profitable.
Evaluating our business and future prospects may be difficult due to the rapidly changing market landscape.
The market we are attempting to enter is rapidly evolving and is experiencing technological advances and new market entrants. Our future success will require us to commercialize our technology and we have limited experience upon which to predict whether it will be successful. As a result, you should consider our business and prospects in light of the risks, expenses and challenges that we will face as an early-stage company seeking to develop and manufacture new products in a growing and rapidly evolving market.
Any future solar power products may not gain market acceptance, which would prevent us from achieving increased sales and market share.
The development of a successful market for solar power products may be adversely affected by a number of factors, many of which are beyond our control, including:
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our failure to produce solar power products that compete favorably against other solar power products on the basis of cost, quality and performance;
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whether or not customers will accept our new technology and any products based on that technology; and
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our failure to develop and maintain successful relationships with distributors, systems integrators and other resellers, as well as strategic partners.
If our proposed solar power products fail to gain market acceptance, we would be unable to establish sales and market share and to achieve and sustain profitability.
Technological changes in the solar power industry could render any future solar power products uncompetitive or obsolete, which could reduce our market share and cause our sales to decline.
Our failure to develop our technology and introduce new solar power products could cause our technology to become uncompetitive or obsolete, which could reduce our ability to sell products or gain market share and cause potential sales to decline. The solar power industry is rapidly evolving and competitive. We will need to invest significant financial resources in future research and development to keep pace with technological advances in the solar power industry and to effectively compete in the future. Our development efforts may be rendered obsolete by the technological advances of others and other technologies may prove more advantageous for the commercialization of solar power products.
Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships would adversely affect our market penetration and revenue growth.
We may be required to establish strategic relationships with third parties in the solar power industry, including in international markets. Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control, such as the competitive position of our technology and our products relative to our competitors. We currently do not have and we can provide no assurance that we will be able to establish any strategic relationships in the future.
In addition, any strategic alliances that we establish, will subject us to a number of risks, including risks associated with sharing proprietary information, loss of control of operations that are material to developed business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement and subject us to the risk that the third party will not perform its obligations under the relationship, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic alliances with third parties are successful, our business may be adversely affected by a number of factors that are outside of our control.
Our management team may not be able to successfully implement our business strategies.
Our management team has limited experience in the alternative energy sector, and to date our management team has been unable to execute on its business strategies, and our product development, the establishment of manufacturing operations and distribution network and our sales and marketing activities have been materially and adversely affected. In addition, we may encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by any future growth. We may seek to augment or replace members of our management team or we may lose key members of our management team, and we may not be able to attract new management talent with sufficient skill and experience.
We will compete with organizations of all sizes from multinational manufacturing and energy companies to similar sized startup companies as well as research and educational institutions. Developments by competitors may render our technologies or potential products obsolete or non-competitive.
Companies pursuing similar technologies including different but related fields represent substantial competition. Many of these organizations are some of the largest companies in the world and have substantially greater capital resources, research and development staffs and facilities, as well as greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel, parties for acquisitions, joint ventures or other collaborations. As a result, there is no assurance that our technology will prove viable or that we will be able to compete with these larger organizations to produce any product or service.
Existing regulations and changes to such regulations may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products.
The market for electricity generation products is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as internal policies and regulations promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are being modified and may continue to be modified. Customer purchases of, or further investment in the research and development of, alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our solar power products. For example, utility companies commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase the cost to our customers of using our solar power products and make them less desirable, thereby harming our business, prospects, results of operations and financial condition. We anticipate that our solar power products and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters. There is also a burden in having to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar power products may result in significant additional expenses to us and our resellers and their customers and, as a result, could cause a significant reduction in demand for our solar power products.
Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.
We are required to comply with all foreign, federal, state and local regulations regarding protection of the environment. If more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be substantial. We may need to procure certain governmental and other permits to conduct our business. If we fail to comply with present or future environmental regulations, however, we may be required to pay substantial fines, suspend future production or cease operations. The manufacture of our potential products may use, generate and discharge toxic, volatile and otherwise hazardous chemicals and wastes. Any failure by us to control the use of, or to restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operations. In addition, under some foreign, federal and state statutes and regulations, a governmental agency may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for such release or otherwise at fault.
Product liability claims against us could result in adverse publicity and potentially significant monetary damages.
Like other retailers, distributors and manufacturers of products that are used by consumers, we may face an inherent risk of exposure to product liability claims in the event that the use of the solar power products we intend to sell results in injury. Since our intended products are electricity producing devices, it is possible that consumers could be injured or killed by potential products, whether by product malfunctions, defects, improper installation or other causes. In addition, we cannot predict whether product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. Moreover, we may not have adequate resources in the event of a successful claim against us. We will need to evaluate the potential risks we face and procure appropriate levels of insurance for product liability claims. There is no assurance we will be able to afford such coverage to adequately protect the Company and its stockholders. The successful assertion of any future product liability claims against us could result in potentially significant monetary damages and if any insurance protection is inadequate to cover these claims, they could require us to make significant payments.
If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish.
Our success, competitive position and future revenues will depend in part on our ability, and the abilities of any licensors we may engage, to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.
We cannot predict:
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the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our licensed patents;
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if and when patents will issue;
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whether or not others will obtain patents claiming aspects similar to those covered by our licensed patents and patent applications; or
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whether we will need to initiate litigation or administrative proceedings which may be costly whether we win or lose.
Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as any licensors and contractors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we will rely on trade secret protection and confidentiality agreements. To this end and to the extent possible, we intend to require all of our employees and consultants to enter into agreements which prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.
If we infringe the rights of third parties we could be prevented from selling products, forced to pay damages, and defend against litigation.
If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to:
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obtain licenses, which may not be available on commercially reasonable terms, if at all;
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redesign our products or processes to avoid infringement;
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stop using the subject matter claimed in the patents held by others, which could cause us to lose the use of one or more of our product candidates;
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pay damages; or
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defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our valuable management resources.
We rely on key executive officers and scientific advisors, and their knowledge of our business and technical expertise would be difficult to replace.
We currently do not have a key scientific advisor or chief technical officer with knowledge of our technology. As such, we have been unable to significantly advance the development of our intellectual property during the past fiscal year. We also do not have “key person” life insurance policies for any of our officers. The loss of the technical knowledge and management and industry expertise of any of our current or future key personnel could result in delays in product development, loss of customers and sales and diversion of management resources, which could adversely affect our operating results.
If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.
We will need to hire additional qualified personnel with expertise in solar cell technology, government regulation, development and manufacturing, and sales and marketing. We may face significant competition for qualified individuals, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the Peoples Republic of China (PRC) government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our anticipated products and materially and adversely affect our competitive position.
We have intentions to conduct certain business operations in China and a portion of our potential sales could be made in China in the future. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
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the amount of government involvement;
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the level of development;
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the growth rate;
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the control of foreign exchange; and
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the allocation of resources.
While the Chinese economy has grown significantly in recent years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government to slow the pace of growth of the Chinese economy could result in decreased capital expenditure by solar energy users, which in turn could reduce demand for our anticipated products.
Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of renewable energy investments and expenditures in China, which in turn could lead to a reduction in demand for our anticipated products and consequently have a material adverse effect on our businesses.
Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.
We could conduct a substantial portion of our business through an agreement with third parties that conducts a majority of their business in China. These arrangements may be subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
Foreign exchange transactions by companies under China’s capital account continue to be subject to significant foreign exchange controls and require the approval of PRC governmental authorities.
DESCRIPTION OF BUSINESS OF SURGLINE, INC.
On September 1, 2011, we entered into and consummated the First Amendment to the Agreement Concerning that Exchange of Securities (the “Share Exchange Agreement”) with SurgLine, Inc., a Nevada corporation (“SurgLine”) and the shareholders of SurgLine.
COMPANY OVERVIEW
SurgLine, Inc (“SurgLine”) was formed in March of 2011. Our plan is to provide our own proprietary label, of high quality medical and surgical products at discount prices. The Company’s founders saw the need to help reduce costs in the acute care healthcare system, and particularly that of the Operating Rooms. The Company’s core business strategy is simply: Source and sell the highest quality medical and surgical products for substantially less, thereby reducing the “historical brand premium” that has historically been absorbed by healthcare end users, including hospitals, outpatient surgery centers, medical clinics, self-insured employers, managed care organizations, commercial insurance carriers and state and federal governmental payers.
Widespread economic challenges have impacted all healthcare providers as costs of goods continue to rise, patient reimbursement becomes more difficult and a growing percentage of patients have either lost their health insurance or are in default on their medical bills. The healthcare sector consumes 16.2% of the economy and is growing annually.1 Combined with these factors, 70 million baby boomers who either have entered or will be entering retirement age 2 are putting additional pressure on the healthcare system. The demand for healthcare services is tied closer to age than any other factor. We believe the pressure on healthcare providers has never been greater and this trend is expected to accelerate.
We intend to provide lower cost products by selling high volume disposable medical products at substantially lower prices when compared to the historical supply chain sources available on the market. We plan to accomplish this by sourcing products within the U.S. and globally from many of the same factories that produce similar products for the world’s largest medical companies. The traditional acquisition cost of medical and surgical supplies, instrumentation, equipment, hospital beds, operating lights and more sold by the largest medical/surgical suppliers can hover at five to ten fold markups. We plan on attacking the “brand premium” much in the same way as Costco has with their Kirkland private label brand, or Home Depot has with their Hampton Bay brand. Essentially, we plan on offering virtually similar products, with our SurgLine brand, at substantial savings by reducing the massive markup percentages that are passed on to the end users. We believe our sourcing and competitive advantage is based on over a decade of international business relationships of our executive management team with worldwide manufacturers. Because of the relationships developed by our executives, we have connections to nearly 200 different manufacturers globally and over 10,000 products already identified.
Additionally, our executives have long and successful industry track records and long standing relationships with key healthcare decision makers. We believe that healthcare, like many businesses, is a relationship business. Knowing who makes the decisions within organizations and having access to that person is a distinct advantage over an industry outsider. Our founders’ 100 plus years of healthcare experience will be leveraged to drive our success.
The Management team believes that there is substantial likelihood that there will be an erosion in Hospital “physician preference” arrangements in the future which historically has allowed the physician to select his or her own preferred products to use with less regard for economic cost. These arrangements may come under scrutiny due to downward financial pressures being placed on hospitals and surgery center operators by the payer community including the governmental payers in an effort to reign in costs.
TARGET MARKETS AND MARKETING STRATEGY
Our initial target market will be to identify and contract with successful stock and bill distributors and institutional buyers. These entities purchase in bulk, have the ability to stock and support products, have direct relationships with healthcare institutions and are highly motivated to cut costs to meet institutional demands. We will endeavor to form relationships with stock and bill distributors that have end user customers in place as well as in-depth product knowledge. Additionally, we believe it is easier to service a hand full of large customers in the beginning rather than to attempt to sell directly to end users that would take hundreds of accounts to match the revenue potential. We intend to leverage the existing relationships of our executives and associates with buyers that have already shown great interest.
The initial product focus will be on surgical products, both disposable and instrumentation. We believe these are high volume, high margin products. Where possible, we intend to brand the products with our own label “Surg”. An example of the product range is:
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Surgical Instruments including but not limited to:
i.e.: Scissors, forceps, basket punches, reamers
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Surgical Sets / Specialties (not limited to)
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Hand & foot
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Hips and knees
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Spine products, including but not limited to pedicle screws, plates, rods, hooks, cages and biologics
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Small Fragment sets
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Includes: tray, instruments, screws, implants, etc.
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Emergency Removal
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Broken screws, implant removal
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Full Range of Endoscopes covering several specialties
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Full Range of Surgical Disposable - single use items
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Custom Surgical Packs
As our business focus develops, we intend to expand the depth and breadth of product offerings based on customer demand. Also, we may decide to sell directly to select end user customers in situations where the additional margin opportunity more than offsets the costs of managing those customers.
GROWTH STRATEGY
We intend to focus our initial efforts on revenue and sales to buyers located within the Southwest region of the U.S. As we expand and refine our business, we intend to leverage existing relationships in major metropolitan markets throughout the U.S. We anticipate expanding sales and marketing efforts nationwide. As working capital permits, we plan to recruit a national sales force of experienced medical product sales professionals who have their own network of relationships in each market. These relationships will be leveraged in the same manner with sales focused on stocking distributors with existing end user customer bases in place, as well as product knowledge.
COMPETITION
We will be competing against traditional purveyors of medical supplies in the medical/surgical supply space. Specifically, we will compete with Medtronic, Stryker, Johnson and Johnson, Henry Schein, McKesson, PSS World Medical, and Medline as well as a variety of small privately held local and regional distributors throughout the marketplace.
Henry Schein, Inc. distributes healthcare products and services primarily to office-based healthcare practitioners. It also provides branded and generic pharmaceuticals, vaccines, diagnostic tests, infection-control products, X-ray products, equipment, vitamins and animal health products. It operates in the United States, Australia, Austria, Belgium, Canada, the People’s Republic of China, the Czech Republic, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Portugal, Slovakia, Spain, Switzerland, the United Kingdom, Iceland, Israel, Saudi Arabia, and the United Arab Emirates. The company was founded in 1992 and is headquartered in Melville, New York.
McKesson Corporation distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products in North America. Its customers include hospitals, physicians, homecare providers, retail pharmacies, and payers in North America, the United Kingdom, Ireland, other European countries, Asia Pacific, and Israel. The company was founded in 1833 and is based in San Francisco, California.
PSS World Medical, Inc., together with its subsidiaries, distributes medical products and equipment, pharmaceutical products, healthcare information technology, and billing services to alternate-site healthcare providers in the United States. As of April 2, 2010, it operated a distribution network consisting of 27 full-service distribution centers, 34 break-freight locations, and 2 redistribution facilities. The company was founded in 1983 and is based in Jacksonville, Florida.
Medline was founded in 1966, but its roots date back 100 years when A.L. Mills started Northwestern Garment Factory. Since then, the company has grown into America's largest privately held national manufacturer and distributor of health care supplies and services. Medline provides products and services to the entire continuum of care, including hospitals, extended care facilities, surgery centers, commercial laundries, home care dealers, home care agencies, physician offices and other alternate care sites. Headquartered in Mundelein, IL, Medline has more than 6,800 employees in North America, including an 800 person dedicated sales force.
We believe that our strategy of delivering virtually similar proprietary products from many of the same supply sources, in many cases, virtually identical private labeled products at substantial savings to the end user that will average 20% to 30% or more will allow us to be highly successful against the legacy competitors.
We believe the larger legacy companies are bloated with thousands of employees, tremendous inefficiencies due to their sheer size, and that they cannot afford to reduce their prices to their customers by 20% to 30% or more as we plan to do. Some of these large suppliers have attempted to shift their customers to use their own “private labeled products” in an attempt to lower the end user’s cost while retaining the customer; however, their private label strategy leaves very substantial margins and profits while reducing the end user’s cost by only a small percentage savings on average.
The Company’s competitors have longer operating histories, significantly greater financial, technical, marketing, service and other resources and significantly greater name recognition. As a result, such competitors may be able to devote greater resources to the development and marketing of their platforms, and may be able to respond more quickly to changes in customer requirements or product technology. Accordingly, there can be no assurance that the Company will compete successfully with existing or new competitors, or that the competition will not have a material adverse effect on the business, operating results or financial condition of the Company (See “RISK FACTORS”)
The Company currently has no full time employees other than the above officers. The Company is not a party to any collective bargaining agreements.
FACILITIES
The Company’s administrative offices are located at 5348 Vegas Drive, Las Vegas, NV 89108. The Company also leases office space in Newport Beach, Ca. on a month-to-month basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s only known potential sources of capital are possible proceeds from private placements, issuance of notes payable, loans from its officers, and cash from future revenues after the Company commences sales. The Company may require additional financing to continue operations, and there is no assurance that such additional financing will be available.
GOVERNMENT REGULATION
The Medical Device Amendments of 1976 to the federal Food, Drug and Cosmetic Act and the Safe Medical Devices Act of 1990, together with regulations issued or proposed thereunder, provide for regulation by the FDA of the design, manufacture and marketing of medical devices, including most of the Company’s products.
The FDA’s Quality System regulations set forth standards for the Company’s product design and manufacturing processes, require the maintenance of certain records and provide for inspections of the Company’s facilities by the FDA. There are also certain requirements of state, local and foreign governments that must be complied with in the manufacturing and marketing of the Company’s products.
Most of the Company’s products are purchased from third party manufacturers that fall into FDA classifications that require notification of and review by the FDA before marketing, submitted as a 510(k). Section 510(k) of the Food, Drug and Cosmetic Act requires device manufacturers who must register, to notify FDA of their intent to market a medical device at least 90 days in advance. This is known as Premarket Notification - also called PMN or 510(k). This allows FDA to determine whether the device is equivalent to a device already placed into one of the three classification categories. Thus, "new" devices (not in commercial distribution prior to May 28, 1976) that have not been classified can be properly identified. Specifically, medical device manufacturers are required to submit a premarket notification if they intend to introduce a device into commercial distribution for the first time or reintroduce a device that will be significantly changed or modified to the extent that its safety or effectiveness could be affected. Such change or modification could relate to the design, material, chemical composition, energy source, manufacturing process, or intended use. Prior to selling any product that requires a 510(k) approval, we ascertain that the manufacturer has complied with 510(k). Certain of the Company’s products require extensive clinical testing, consisting of safety and efficacy studies, followed by PMA applications for specific surgical indications.
SurgLine also is subject to the laws that govern the manufacture and distribution of medical devices of each country in which the Company manufactures or sells products. The member states of the European Union (EU) have adopted the European Medical Device Directives, which create a single set of medical device regulations for all EU member countries. These regulations require companies that wish to manufacture and distribute medical devices in EU member countries to obtain CE Marking for their products. SurgLine has authorization to apply the CE Marking to substantially all of its products.
Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare expenses generally and hospital costs in particular, including price regulation and competitive pricing, are ongoing in markets where the Company does business. It is not possible to predict at this time the long-term impact of such cost-containment measures on the Company’s future business.
RISK FACTORS ASSOCIATED WITH THE BUSINESS OF SURGLINE, INC.
We have a limited operating history on which to base an investment decision.
We are a newly created startup company that has very limited operating history. As a startup company, we are subject to unforeseen costs, expenses, problems and difficulties inherent in new business ventures. There is no history upon which to base any assumption as to the likelihood that the company will prove successful. We cannot provide investors with any assurance that our services will attract customers; generate any operating revenue or ever achieve profitable operations. If we are unable to address these risks, there is a high probability that our business can fail.
Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships would adversely affect our market penetration and revenue growth.
We may be required to establish strategic relationships with third parties in the medical and surgical products industry, including agreements with stocking distributors, sales channel agreements and others. Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control, such as the competitive position of our product and marketing plan relative to our competitors. We may not be able to establish other strategic relationships in the future.
In addition, any strategic alliances that we establish may subject us to a number of risks, including risks associated with sharing proprietary information, loss of control of operations that are material to developed business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement and subject us to the risk that the third party will not perform its obligations under the relationship, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic alliances with third parties are successful, our business may be adversely affected by a number of factors that are outside of our control.
Our management team may not be able to successfully implement our business strategies.
If our management team is unable to execute on its business strategies, then our development, including the establishment of revenues and our sales and marketing activities would be materially and adversely affected. In addition, we may encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by any future growth. We may seek to augment or replace members of our management team or we may lose key members of our management team, and we may not be able to attract new management talent with sufficient skill and experience.
If we infringe the rights of third parties we could be prevented from selling products, forced to pay damages, and defend against litigation.
If our products infringe the proprietary rights of other parties, we could incur substantial costs and we may have to:
?
obtain licenses, which may not be available on commercially reasonable terms, if at all;
?
redesign our product to avoid infringement;
?
stop using the subject matter claimed in the patents held by others, which could cause us to lose the use of one or more of our products;
?
pay damages; or
?
defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our valuable management resources.
If we are unable to hire additional qualified personnel, our ability to grow our business may be harmed.
We will need to hire additional qualified personnel with expertise in the medical and surgical products industry related to procurement of product, sales and marketing. We may face significant competition for qualified individuals, and we cannot be certain that our search for such personnel will be successful. Attracting and retaining qualified personnel will be critical to our success.
If we fail to develop our brand and advertise the products we sell effectively, our business may suffer.
We believe that developing and maintaining awareness of our brand is critical to achieving widespread acceptance of our existing and future services and products and is an important element in attracting new customers. We believe that our efforts to build our brand, including advertisements that will be designed to promote our corporate image, our merchandise and the pricing of such products, will involve significant expense. Our proposed brand promotion activities may not yield revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brands. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain any existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.
We are subject to shifting customer preferences and we may fail to optimize our product offerings and inventory positions.
Consumer and healthcare provider’s preferences in the medical supply industry change rapidly and are difficult to predict. The success of our business depends on our ability to predict accurately and respond to future changes in such preferences, carry the inventory demanded by customers, deliver the appropriate quality of products, price products correctly and implement effective purchasing procedures. We must optimize our product selection and inventory positions based on these preferences and sales trends. If we fail to anticipate, identify or react appropriately to changes and adapt our product selection to these changing preferences, we could experience excess inventories, higher than normal markdowns or an inability to sell the products we sell, which, in turn, could significantly reduce our revenue and have a material adverse effect on our business, financial condition and results of operations.
If we fail to maintain optimal inventory levels, our inventory holding costs could increase or cause us to lose sales, either of which could have a material adverse effect on our business, financial condition and results of operations.
While we must maintain sufficient inventory levels to operate our business successfully and meet our customers’ demands, we must be careful to avoid amassing excess inventory. Changing consumer demands, manufacturer backorders and uncertainty surrounding new product launches expose us to increased inventory risks. Demand for products can change rapidly and unexpectedly, including the time between when the product is ordered from the supplier to the time it is offered for sale. We carry a wide variety of products and must maintain sufficient inventory levels of the products we sell. We may be unable to sell certain products in the event that consumer demand changes. Our inventory holding costs will increase if we carry excess inventory. However, if we do not have a sufficient inventory of a product to fulfill customer orders, we may lose orders or customers, which may adversely affect our business, financial condition and results of operations. We cannot assure you that we can accurately predict consumer demand and events and avoid over-stocking or under-stocking products.
Due to the initial geographic concentration of sales in Southern California, our results of operations and financial condition are subject to fluctuations in regional economic conditions.
A significant percentage of our total sales will initially be made in Southern California. We believe that for the foreseeable future, approximately 80%-90% of our future revenues will be generated from this area. Our concentration of sales in this area heightens our exposure to adverse developments related to competition, as well as economic and demographic changes in this region. Our geographic concentration might result in a material adverse effect on our business, financial condition or results of operations in the future.
If any of our customers fail to pay all or part of their invoices or delay payment, our results of operations and financial condition will be adversely affected.
Currently we have no accounts receivables. However, once we begin making sales, we will begin building accounts receivables. The standard credit period for most of our customers is anticipated to be approximately net 60 days. There is no assurance that our accounts receivable will be fully repaid on a timely basis. If any of our customers with accounts receivables fail to pay all or part of the accounts receivable or delay the payment due to us for whatever reason, our net profit will decrease and our profitability will be adversely affected.
Disruptions in our ability to source product and any changes in the competitive environment for our products may adversely affect our profitability.
We plan to sell a broad range of medical related products. A significant disruption in the supply of these products could decrease inventory levels and sales, and materially adversely affect our business and financial results. Shortages of products or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism or other interruptions or difficulties in the employment of labor or transportation in the markets in which we purchase products may adversely affect our ability to maintain sufficient inventories of our products to meet consumer demand. If we were to experience a significant or prolonged shortage of products from any of our suppliers and could not procure the products from other sources, we would be unable to meet customer demand, which, in turn, would adversely affect our sales, margins and customer relations. Further, rising cost of labor and consumer goods in general could reduce our margins, and reduce our net earnings.
Our operations would be materially adversely affected if third-party carriers were unable to transport our products on a timely basis.
All of our products are shipped through third party carriers. If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers may be unavailable or may not have the capacity to deliver our products to our customers. If adequate third party sources to ship our products were unavailable at any time, our business would be materially adversely affected.
We face increasing competition from both domestic and foreign companies and, if we cannot effectively compete, our business will be harmed.
The medical supply industry in which we operate is highly fragmented and competitive. Our ability to compete in the industry is, to a significant extent, dependent on our ability to distinguish our wholesale distribution of medical supplies and related products from those of our competitors by providing high quality services and products with competitive prices and convenient access. We compete directly with local suppliers and with large foreign multinational companies that offer services and products that are similar to ours. Some of these competitors have larger local or regional customer bases, more locations, more brand equity, and substantially greater financial, marketing and other resources than we have. We anticipate that our competitors will continue to improve their wholesale distribution or retail medical supply businesses and may be in a stronger position to respond quickly to potential acquisitions and other market opportunities.
We cannot assure you that our current or potential competitors will not provide wholesale distribution or retail medical supply services and products comparable or superior to those we provide or adapt more quickly than we do to evolving industry trends or changing market requirements. Increased competition may result in price reductions, reduced margins and loss of market share, any of which could materially adversely affect our profit margins. We cannot assure you that we will be able to compete effectively against current and future competitors. Aggressive marketing or pricing by our competitors or the entrance of new competitors into our markets could have a material adverse effect on our business, results of operations and financial condition.
If we become subject to product liability claims, personal injury claims or defective products our business may be harmed.
We intend to brand certain products with our own brand. Such branding will subject us to increased risk as once branded with our name, we become subject to increased oversight and regulation, including from the FDA. As a result, our potential liability for product failure will increase significantly. In addition, the medical supplies we are going to sell and our business in general is exposed to risks inherent in the packaging and distribution of medical supplies, such as mislabeling, adequacy of warnings, and the failure of any particular product to perform as expected. There may come a point where we are required to warn customers regarding any potential negative effects of a particular product. We do not believe we are under any such obligation at this time or will be in the future. We may sell products which inadvertently have an adverse effect on the health of individuals. Product liability claims may be asserted against us with respect to any of the products we sell. We do not believe we have any liability for claims related to products we sell but there is no guarantee we either won’t be sued or we won’t be held responsible. We may be required to pay for damages for any successful product liability claim against us, although we may have the right under applicable laws, rules and regulations to recover from the relevant manufacturer compensation we paid to our customers in connection with a product liability claim. Any product liability claim, product recall, adverse side effects caused by improper use of the products we sell or manufacturing defects may result in adverse publicity regarding us and the products we sell, which would harm our reputation. If we are found liable for product liability claims, we could be required to pay substantial monetary damages. Furthermore, even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources, which could disrupt our business, and our reputation as well as our brand name, may also suffer. We, like many other similar companies that sell medical supplies, do not carry product liability insurance. As a result, any imposition of product liability could materially harm our business, financial condition and results of operations. In addition, we do not have any business interruption insurance due to the limited coverage of any such business interruption insurance, and as a result, any business disruption or natural disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.
The failure to manage growth effectively could have an adverse affect on our employee efficiency, product quality, working capital levels and results of operations.
Any significant growth in the market for our products or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. As of July 31, 2011, we had zero full time employees. During any period of growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the purchase of raw materials and supplies, development of new products, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.
We are dependent on certain key personnel and loss of these key personnel could have a material adverse affect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. Each of the named executive officers, including Mr. Tom Toland, our Chief Executive Officer and President and Richard Dutch, our Chief Operating Officer, perform key functions in the operation of our business. The loss of these employees could have a material adverse effect upon our business, financial condition, and results of operations. We do not maintain key-person insurance for members of our management team because it is cost prohibitive at this point. If we lose the services of any senior management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects.
We will be dependent to hire, train, retain and effectively recruit employees and any inability to do so, could have a materially adverse affect on our business, financial condition and result of operations.
We must attract, recruit and retain qualified and trained staff in order to operate our business. We face competition for personnel from other medical product suppliers. We cannot assure you that we will be able to attract, hire and retain sufficient numbers of skilled employees that are necessary to continue to develop and grow our business. Although we are presently in compliance with government licensing requirements, these requirements are subject to change, and in the event that different or stricter professional standards are imposed, we may face difficulty in attracting, hiring and retaining sufficient numbers of personnel with the requisite credentials and qualifications, which could limit our ability to increase revenue or deliver high quality customer service, and this could have a material adverse effect on our financial condition and results of operations.
Our ability to implement effectively our business strategy and expand our operations will depend upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced managers and other technical and marketing personnel. There is significant competition for technically qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our current and future operational needs.
Our financial results may not meet the expectations of investors and may fluctuate because of many factors and, as a result, investors should not rely on our historical financial data as indicative of future results.
Fluctuations in operating results or the failure of operating results to meet the expectations investors may negatively impact the value of our securities. Operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value of our securities to decline. Investors should not rely on comparisons of results of operations as an indication of future performance. As a result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:
·
vulnerability of our business to a general economic downturn in California and the U.S. generally;
·
fluctuation and unpredictability of the prices of the products we sell;
·
seasonality of our business;
·
changes in laws that may affect our operations;
·
competition from other medical supply companies; and
·
our ability to obtain necessary government certifications and/or licenses to conduct our business.
Our strategy may include acquiring companies which may result in unsuitable acquisitions or failure to successfully integrate acquired companies, which could lead to reduced profitability.
We may embark on a growth strategy through acquisitions of companies or operations that complement existing product lines, customers or other capabilities. We may be unsuccessful in identifying suitable acquisition candidates, or may be unable to consummate desired acquisitions. To the extent any future acquisitions are completed, we may be unsuccessful in integrating acquired companies or their operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse impact on future profitability. Some of the risks that may affect our ability to integrate, or realize any anticipated benefits from, acquisitions include:
·
unexpected losses of key employees or customer of the acquired company;
·
difficulties integrating the acquired company’s standards, processes, procedures and controls;
·
difficulties coordinating new product and process development;
·
difficulties hiring additional management and other critical personnel;
·
difficulties increasing the scope, geographic diversity and complexity of our operations;
·
difficulties consolidating facilities, transferring processes and know-how;
·
difficulties reducing costs of the acquired company’s business;
·
diversion of management’s attention from our management; and
·
adverse impacts on retaining existing business relationships with customers.
Our Chief Executive Officer and certain related Company Officers and stockholders possess the majority of our voting power, and through this ownership, control our Company and our corporate actions.
Our current CEO and President, Thomas Toland, our Chief Operating Officer, Richard Dutch, MD Capital Advisors, Inc. and Core Winner Holdings Limited, collectively hold approximately 58% of the voting power of the outstanding shares immediately after this Share Exchange Agreement. If these officers and/or stockholders were to act as a group, they would have a controlling influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant corporate actions. Such officers and/or stockholders may also have the power to prevent or cause a change in control. In addition, without the consent of these stockholders, we could be prevented from entering into transactions that could be beneficial to us. The interests of these stockholders may give rise to a conflict of interest with the Company and the Company’s shareholders. For additional details concerning voting power please refer to the section below entitled “Description of Securities.”
A decline in the price of our common stock could affect our ability to raise working capital and adversely impact our ability to continue operations.
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. A decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new services and continue our current operations. If our common stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.
Concentrated ownership of our common stock creates a risk of sudden changes in our common stock price.
The sale by any shareholder of a significant portion of their holdings could have a material adverse effect on the market price of our common stock.
Sales of our currently issued and outstanding stock may become freely tradable pursuant to Rule 144 and may dilute the market for your shares and have a depressive effect on the price of the shares of our common stock.
A substantial majority of the outstanding shares of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) (“Rule 144”). As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that a non-affiliate who has held restricted securities for a period of at least six months may sell their shares of common stock. Under Rule 144, affiliates who have held restricted securities for a period of at least six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to the sale (the four calendar week rule does not apply to companies quoted on the OTCQB). A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop.
The securities issued in connection with the Share Exchange are restricted securities and may not be transferred in the absence of registration or the availability of a resale exemption.
The shares of common stock being issued in connection with the Share Exchange are being issued in reliance on an exemption from the registration requirements under Section 4(2) of the Securities Act and Regulation D promulgated thereunder or Regulation S. Consequently, these securities will be subject to restrictions on transfer under the Securities Act and may not be transferred in the absence of registration or the availability of a resale exemption. In particular, in the absence of registration, such securities cannot be resold to the public until certain requirements under Rule 144 promulgated under the Securities Act have been satisfied, including certain holding period requirements. As a result, a purchaser who receives any such securities issued in connection with the Share Exchange may be unable to sell such securities at the time or at the price or upon such other terms and conditions as the purchaser desires, and the terms of such sale may be less favorable to the purchaser than might be obtainable in the absence of such limitations and restrictions.
If we issue additional shares or derivative securities in the future, it will result in the dilution of our existing stockholders.
Our Certificate of Incorporation authorizes the issuance of up to 6,475,000,000 shares of common stock, $0.001 par value per share, and 25,000,000 shares of preferred stock, $0.001 par value per share. Our board of directors may choose to issue some or all of such shares, or derivative securities to purchase some or all of such shares, to provide additional financing in the future.
We do not plan to declare or pay any dividends to our stockholders in the near future.
We have not declared any dividends in the past, and we do not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
The requirements of being a public company may strain our resources and distract management.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). These requirements are extensive. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting.
We may incur significant costs associated with our public company reporting requirements and costs associated with applicable corporate governance requirements. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
If we do not file our quarterly or annual reports with the SEC, we may be de-listed from the OTCQB.
OTCQB is the middle tier of the OTC market. OTCQB companies report to the SEC or a U.S. banking regulator, making it easy for investors to identify companies that are current in their reporting obligations. There are no financial or qualitative standards to be in this tier. OTCQB securities may also be quoted on the FINRA BB. The OTCQB allows investors to easily identify reporting companies traded in the OTC market regardless of where they are quoted.
Under OTCQB rules relating to the timely filing of periodic reports with the SEC, any OTCQB issuer who fails to file a periodic report (Forms 10-Q or 10-K) by the due date of such report, period we may be removed from the OTCQB and our common stock may only be able to be traded on the OTC Pink. The OTC Pink is the bottom tier of the OTC market - a speculative trading marketplace that helps broker-dealers get the best prices for investors. Accordingly, our securities may become worthless and we may be forced to curtail or abandon our business plan.
Persons associated with securities offerings, including consultants, may be deemed to be broker dealers.
In the event that any of our securities are offered without engaging a registered broker-dealer, we may face claims for rescission and other remedies. If any claims or actions were to be brought against us relating to our lack of compliance with the broker-dealer requirements, we could be subject to penalties, required to pay fines, make damages payments or settlement payments, or repurchase such securities. In addition, any claims or actions could force us to expend significant financial resources to defend our company, could divert the attention of our management from our core business and could harm our reputation.
Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.
We have the right to issue up to 25,000,000 shares of preferred stock, which may adversely affect the voting power of the holders of our other securities and may deter hostile takeovers or delay changes in management control.
We may issue up to 25,000,000 shares of preferred stock from time to time in one or more series, and with such rights, preferences and designations as our board of directors may determine from time to time. To date, our board of directors have authorized Series A and B of preferred stock. Additionally, our board of directors, without further approval of our common stockholders, is authorized to fix the dividend rights and terms, conversion rights, voting rights, redemption rights, liquidation preferences and other rights and restrictions relating to any series of our preferred stock. Issuances of shares of preferred stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of our other securities and may, under certain circumstances, have the effect of deterring hostile takeovers or delay changes in management control.
ITEM 2.
ITEM 2.
PROPERTIES.
Our executive offices are located at 319 Clematis Street - Suite 703, West Palm Beach, Florida 33401 and are provided to us on a month to month basis by a corporation in which our officers and director are affiliated. We also utilize space in Centennial, Colorado that is provided to us on a month to month basis by a corporation in which one of our directors is affiliated with. These spaces are provided to us for $600 and $225 respectively on a monthly basis during the year ended July 31, 2011 and included the use of office space and the occasional use of fax machines, copy machines and other office equipment for which we paid nominal service fees.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS.
Our company is not a party in to any bankruptcy, receivership or other legal proceeding, and to the best of our knowledge, no such proceedings by or against us have been threatened.
ITEM 4.
ITEM 4.
REMOVED AND RESERVED
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a)
Market information.
Our common stock is quoted on the Over-the-Counter Bulletin Board, or “OTCQB” under the trading symbol “CNUV”. The following table lists the high and low bid information for our common stock as quoted on the OTCQB for the fiscal years ended 2011 and 2010, respectively:
The above quotations from the OTCQB reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
(b)
Holders.
The number of record holders of our common stock as of November 7, 2011, was approximately 86 based on information received from our transfer agent. This amount excludes an indeterminate number of shareholders whose shares are held in “street” or “nominee” name with a brokerage firm or other fiduciary.
(c)
Dividends.
We have not paid or declared any dividends on our common stock and we do not anticipate paying dividends on our common stock for the foreseeable future.
(d)
Securities authorized for issuance under equity compensation plans.
We have the following securities authorized for issuance under our equity compensation plans as of July 31, 2011. This includes our 2002 Stock Option Plan, covering up to 1,000,000 shares of our common stock, our 2003 Stock Option Plan covering up to 2,500,000 shares of our common stock and our 2007 Stock Option Plan covering up to 18,000,000 shares of our common stock.
Equity Compensation Plan Information
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
$-0-
Equity compensation plans not approved by security holders
16,500,000
$0.03
5,000,000
Total
16,500,000
$0.03
5,000,000
The purpose of both the 2003 Stock Option Plan and the 2007 Stock Option Plan (together the “Plans”) is to increase shareholder value and to advance the interests of the Company by furnishing a variety of economic incentives designed to attract, retain and motivate employees, directors and consultants. Incentives may consist of opportunities to purchase or receive shares of the Company’s common stock. Grants may include both purchase options as well as direct grants of common shares upon conversion of accrued salaries, bonuses, notes payable, fees or other similar payments due from us to an eligible participant. The Plans are administered by our board of directors which determines the terms of all grants including their term, exercise price and vesting period, if applicable. Generally, grants must be at least 100% of the fair market value of our common stock on the date of grant and may be exercisable for up to ten years.
Recent Sales of Unregistered Equity Securities
Shares issued for conversion of subordinated debentures and accrued interest
On December 9, 2010 the Company issued 11,442,360 shares of common stock upon the conversion of $12,500 of debentures and $5,522 of unpaid interest on the debentures. The shares were issued at approximately $0.001575 per share.
From May 1, 2011 through July 31, 2011 the Company issued 79,508,834 shares of common stock upon the conversion of $107,000 of debentures and $12,720 of unpaid interest on the debentures. The shares were issued at an average conversion price of $0.001485 per share.
Shares issued upon conversion of Series A Preferred Stock
On February 2, 2011, the Company issued 18,390,805 shares of common stock upon the conversion of 20,000 shares of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended the shares were issued at approximately $0.001087 per share.
On February 14, 2011 the Company issued 36,936,879 shares of common stock upon the conversion of 39,938 shares of Series A Preferred stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.001081 per share.
On April 1, 2011 the Company issued 10,949,427 shares of common stock upon the conversion of 28,651 shares of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.001337 per share.
From May 1, 2011 through July 31, 2011 the Company issued 137,022,337 shares of common stock upon the conversion of $161,110 shares of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.00175 per share.
Issuances of shares of common stock to affiliated parties
On February 14, 2011 the Company issued 22,000,000 shares of common stock upon the conversion of $32,955 of notes payable. The shares were issued at an average price of approximately $0.0015 per share.
On March 31, 2011 and April 18, 2011 the Company issued a total of 25,000,000 shares of restricted common stock to an officer and director of the Company in satisfaction of $76,665 of amounts owed. The shares were issued at an average price of approximately $.003 per share.
On July 6, 2011 the Company issued 28,000,000 shares of restricted common stock to a former officer of the Company in satisfaction of $38,500 of amounts owed. The shares were issued at an approximately $.001375 per share.
Other issuance of shares of common stock
From December 21, 2010 to January 7, 2011 the Company issued 34,500,000 shares of common stock upon the conversion of $33,300 of notes payable. The shares were issued at an average price of approximately $0.00096 per share.
On February 14, 2011, the Company issued 13,266,666 shares of common stock pursuant to Debt Settlement and Release Agreements in exchange for the cancellation of $19,900 of notes and accrued liabilities. The shares were issued at $0.0015, the price of the common stock on the date the parties had agreed to the settlements.
On April 11, 2011 the Company issued 10,000,000 shares to a consultant. The Company valued the shares at $.004, (the price of the common stock on the date of the agreement) and recorded an expense of $40,000 for the year ended July 31, 2011.
We offered and sold the securities in reliance on an exemption from federal registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder. We relied on this exemption and rule based on the fact that there were a limited number of investors, all of whom were accredited investors and (i) either alone or through a purchaser representative, had knowledge and experience in financial and business matters such that each was capable of evaluating the risks of the investment, and (ii) we had obtained subscription agreements from such investors indicating that they were purchasing for investment purposes only. The securities were not registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The disclosure contained herein does not constitute an offer to sell or a solicitation of an offer to buy any securities of the Company, and is made only as permitted by Rule 135c under the Securities Act.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not required for smaller reporting companies.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General:
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto for the years ended July 31, 2011 and 2010.
The independent auditors’ report on our financial statements for the years ended July 31, 2011 and 2010 includes a “going concern” explanatory paragraph that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 1 to the audited consolidated financial statements.
While our independent auditor has presented our financial statements on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time, they have raised a substantial doubt about our ability to continue as a going concern.
(a)
Liquidity and Capital Resources.
For the year ended July 31, 2011, net cash used in operating activities was $159,692 compared to $108,250 for the year ended July 31, 2010. Net loss was $306,723 for the year ended July 31, 2011 compared to $772,061 for the year ended July 31, 2010. The net loss in the current period were impacted by a write off of bad debt of $52,855, a gain of $115,561 on a debt settlement with the CEO, whereby the market value of shares of preferred stock that were issued in exchange for debt cancellation were less than the debt cancelled and a gain on the sale of the shares of our equity position in IGAM of $493,454. Also included in the current period were non-cash expenses of $516,946 of which $313,437 is associated with the fair market valuation of the convertible debentures, $163,509 is amortization, and $40,000 of common stock based compensation to consultants.
The net loss in the year ago period includes net non-cash expenses of $628,551 of which $123,908 are costs associated with the issuance of common stock and warrants, $171,240 of depreciation and amortization expense and $333,403 related to impairment of assets. These non cash expenses were offset by a decrease in the derivative liability of $154,188 and a change in the minority interest of $5,036.
Net cash provided by financing activities for the year ended July 31, 2011 was $172,940 compared to $108,350 for the year ended July 31, 2010. For the year ended July 31, 2011 the Company received $206,000 on the issuance of convertible notes, $18,200 on the issuance of related party notes and $5,000 on the issuance of notes payable. For the year ended July 31, 2011 the Company repaid $38,760 of related party notes payable, paid $17,500 closing costs on the newly issued convertible notes. For the year ended July 31, 2010 the Company received proceeds of $117,385 on the issuance of notes payable, of which $79,485 were from related parties, and also repaid $9.035 of notes payable, including $7,550 of related party notes payable.
For the year ended July 31, 2011, cash and cash equivalents increased by $13,248 compared to an increase of $100 for the year ended July 31, 2010. Ending cash and cash equivalents at July 31, 2011 was $13,652 compared to $404 at July 31, 2010.
We have limited cash and cash equivalents on hand and need to raise funds to continue to be able to support our operating expenses and to meet our other obligations as they become due. Sources available to us that we may utilize include the sale of unsecured convertible debentures, as well as the exercise of outstanding options and warrants, all of which may cause dilution to our stockholders.
(b)
Results of Operations.
OPERATING EXPENSES
Operating expenses for the year ended July 31, 2011 were $383,566 compared to expenses of $392,679 for the year ended July 31, 2010. The 2010 expenses were comprised management fees of $166,000, stock compensation costs of $123,908 comprised of deferred stock compensation costs, legal and accounting costs of $58,348 and general and administrative costs of $44,423. The 2011 expenses includes a write off of bad debt of $52,855, management fees paid to related parties of $205,200, consulting of $68,500, accounting and legal costs of $31,825 and $25,186 of general and administrative costs.
OTHER INCOME (EXPENSE)
Other income, net for the year ended July 31, 2011 was $76,843 compared to other expenses of $379,382 for the year ended July 31, 2010. For the year ended July 31, 2011 there was a gain on settlement of debt of $115,561 and there was a gain of $493,454 on the sale of the majority owned shares of Interactive. The change in derivative liabilities included in other income (expenses) for the year ended July 31, 2010 was a credit of $154,188 compared to an expense of $313,437 for the year ended July 31, 2011. Interest expense for the years ended July 31, 2011 and 2010 is summarized as:
(c)
Off-Balance sheet arrangements
During the fiscal year ended July 31, 2011, the Company did not engage in any off-balance sheet arrangements as defined in Item 303 of Regulation S-K.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for smaller reporting companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
The financial statements and related information required to be filed are indexed and begin on page and are incorporated herein.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A(T).
ITEM 9A(T).
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO have concluded that as of July 31, 2011 disclosure controls and procedures, were not effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in the application of SEC rules and forms.
Management’s Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
•
Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our CEO and CFO have evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to the extent possible given the limited personnel resources and technological infrastructure in place to perform the evaluation. Based upon our management’s discussions with our auditors and other advisors, our CEO and CFO believe that, during the period covered by this report, such internal controls and procedures were not effective as described below.
We assessed the effectiveness of the Company’s internal control over financial reporting as of evaluation date and identified the following material weaknesses:
Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.
Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.
We are committed to improving the internal controls and will (1) consider to use third party specialists to address shortfalls in staffing and to assist us with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future.
We have discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of this material weakness, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION.
On September 1, 2011, the Registrant entered into and consummated the First Amendment to the Agreement Concerning that Exchange of Securities (the “Share Exchange Agreement”) with SurgLine, Inc., a Nevada corporation (“SurgLine”) and the shareholders of SurgLine. Upon consummation of the transactions set forth in the Agreement (the “Closing”), the Registrant adopted the business plan of SurgLine.
Pursuant to the Agreement, we agreed to acquire all of the outstanding capital stock of SurgLine in exchange (the “Share Exchange”) for the original issuance of an aggregate of 857,143 shares (the “Exchange Shares”) of the Registrant’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). The Exchange Shares will be issued on a pro rata basis, on the basis of the shares held by such security holders of SurgLine at the time of the Exchange. Further in accordance with the Agreement, and following an amendment of the Registrant’s Articles of Incorporation, the Exchange Shares were converted into 3,817,554,433shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) equal to 70% of the issued and outstanding Common Stock of the Registrant. Additionally, pursuant to the provisions of the Share Exchange Agreement, the Company issued 163,609,476 restricted shares of Common Stock to the SurgLine shareholders, in satisfaction of the anti-dilution provisions in the Share Exchange Agreement. As a result of the Share Exchange, the Registrant issued a total of 3,981,163,909 shares of its common stock to the SurgLine shareholders and SurgLine became a wholly-owned subsidiary of the Registrant.
At the effective time of the Exchange, our board of directors and officers was reconstituted by the resignation of Henry Fong as President and Chief Executive Officer of the Registrant and the appointment of Thomas G. Toland as a member of the Registrant’s Board of Directors, President and Chief Executive Officer and Richard Dutch as Secretary and Chief Operating Officer of the Registrant
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
(a)(b)
Identification of directors and executive officers.
The following table sets forth the name, age, position and office term of each executive officer and director of the Company.
Name
Age
Position
Henry Fong
President, Chief Executive Officer and Director
Richard W. Perkins
Director (Resigned October 3, 2011)
Barry S. Hollander
Chief Financial Officer
Thomas G. Toland
Chief Executive Officer, President and Director (effective September 1, 2011)
Richard Dutch
Chief Operating Officer and Secretary (effective September 1, 2011)
(c)
Identification of significant employees.
Not applicable.
(d)
Identification of family relationships.
None.
(e)
Business experience.
Henry Fong. Mr. Fong has been a director of the Company since March 2002 and from March 2002 through September 1, 2011(the date of the acquisition of SurgLine) was also the president and chief executive officer. Mr. Fong is the president and a director of Nuvo since its inception in April 2006. Mr. Fong has been the Chief Executive Officer of Techs Loanstar, Inc., a publicly traded Company, since February 2010 when it merged with ZenZuu USA (“ZZUSA”). Mr. Fong was the Chief Executive Officer of ZZUSA since its inception in June 2009 and the Chief Executive Officer of ZZPartners, Inc. from its inception (April 2008) through its merger with ZZUSA. Mr. Fong has been the president and a director of Alumifuel Power Corporation (f/k/a Inhibiton Therapeutics) since its inception in May 2004. Mr. Fong was the president, treasurer and a director of Hydrogen Power, Inc. (f/k/a Equitex, Inc.) a publicly traded alternative energy company, from its inception in 1983 to January 2007. Mr. Fong has been a director of FastFunds Financial Corporation, a publicly traded financial services company, since June 2004. Mr. Fong is currently the sole director, President and Chief Financial Officer of PB Capital International, Inc. (“PBIC”), a blank check shell company. PBIC is seeking to merge with a target company. PBIC filed a Form 10 registration statement which went effective in October 2009. From 1959 to 1982 Mr. Fong served in various accounting, finance and budgeting positions with the Department of the Air Force. During the period from 1972 to 1981 he was assigned to senior supervisory positions at the Department of the Air Force headquarters in the Pentagon. In 1978, he was selected to participate in the Federal Executive Development Program and in 1981, he was appointed to the Senior Executive Service. In 1970 and 1971, he attended the Woodrow Wilson School, Princeton University and was a Princeton Fellow in Public Affairs. Mr. Fong received the Air Force Meritorious Civilian Service Award in 1982. Mr. Fong has passed the uniform certified public accountant exam. In March 1994, Mr. Fong was one of twelve CEOs selected as Silver Award winners in FINANCIAL WORLD magazine's corporate American "Dream Team."
Richard W. Perkins. Mr. Perkins has over 50 years experience in the investment business, has been President and Investment Manager for Perkins Capital Management since October 1984. Perkins Capital Management is a registered investment advisor with significant experience in individual and institutional capital management including working directly with the public markets emphasizing the micro-cap sector. Mr. Perkins is also a director of several public companies including: Synovis Life Technologies, Inc. since 1984, Nortech Systems, Inc. since 1993, and Vital Images, Inc. since 1985. Mr. Perkins resigned from the Board of Directors on October 3, 2011.
Barry S. Hollander. Chief Financial Officer Mr. Hollander has been the CFO of the Registrant since 2002. Simultaneously therewith, Mr. Hollander has served as the Chief Financial Officer of Techs Loanstar, Inc., a publicly traded Company, since February 2010 when it merged with ZZUSA. Mr. Hollander was the Chief Financial Officer of ZZUSA since its inception in June 2009 and the Chief Financial Officer of ZZPartners, Inc. from its inception (April 2008) through its merger with ZZUSA. Mr. Hollander has been the acting Chief Executive Officer of FastFunds Financial Corporation, a publicly traded company with limited business operations, since January 2007. From 1994 to 1999, Mr. Hollander was the chief financial officer of California Pro Sports, Inc., an in-line skate importer, marketer and distributor. In 1999 California Pro merged with Imaginon, Inc. Mr. Hollander has a BS degree from Fairleigh Dickinson University and passed the uniform certified public accountant exam.
Thomas Toland, President and Chief Executive Officer. Mr. Toland became the President and Chief operating Officer of the Registrant effective with the acquisition of SurgLine. Mr. Toland has more than 30 years of healthcare management experience. Mr. Toland has served as the Chief Executive Officer of SurgLine, Inc. since its inception in March 2011. In 1983, Mr. Toland started his healthcare career with American Medical International until he resigned in 1986 and entered the accounting and financial management and business development positions with Summit Health Corporation, OrNda Health, and Tenet Healthcare. In 2004, Mr. Toland founded Nationwide Pharmacy Management Group, and through 2009focused on the delivery of generic medications and prescription based medical foods to orthopedic surgeons, pain management physicians and primary treating physicians focused on delivering care to injured workers in the state of California. In 2001Mr. Toland formed Toland Healthcare Group (“THG”) and has been the CEO of THG, a healthcare management consulting company located in Newport Beach, California. THG provides hospitals, surgery centers, physicians, medical groups and independent physician associations with healthcare consulting services including negotiating contracts, business strategies, and new revenue opportunities. Mr. Toland is a graduate of the University of Southern California with a Bachelor of Arts in Accounting in 1980.
Richard Dutch, Chief Operating Officer. Mr. Dutch became the Chief Operating Officer of the Registrant effective with the acquisition of SurgLine. Mr. Dutch has served as the President, Chief Operating Officer and Secretary of SurgLine, Inc. since its inception in March 2011. Prior thereto and from June 1985 to March 2011 over 24 years of senior level experience primarily in the healthcare industry. From April 2005 through July 2011, Mr.Dutch was the President of Sterling Medical Products (“Sterling”) a privately held healthcare company. At Sterling, Mr. Dutch was responsible for the success and growth of one of the fastest growing, national orthopedic suppliers in the medical industry. Primary responsibilities were productivity, operations, with specific focus on increasing gross profit, revenue and financial ratios in accordance with the company forecast and business plan. Duties also included strategic planning and maintaining the principles of Six Sigma to insure operational excellence and that all corporate objectives are met.
(f)
Involvement in certain legal proceedings.
Not applicable.
(g)
Promoters and control persons.
Not applicable
Code of Ethics
In 2003 we adopted a Code of Ethics for Senior Financial Management to promote honest and ethical conduct and to deter wrongdoing. This Code applies to our Chief Executive Officer, Chief Financial Officer, controller, principal accounting officer and other employees performing similar functions. The obligations of the Code of Ethics supplement, but do not replace, any other code of conduct or ethics policy applicable to our employees generally.
Under the Code of Ethics, all members of the senior financial management shall:
·
Act honestly and ethically in the performance of their duties at our company,
·
Avoid actual or apparent conflicts of interest between personal and professional relationships,
·
Provide full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submits to, the SEC and in other public communications by our company,
·
Comply with rules and regulations of federal, state and local governments and other private and public regulatory agencies that affect the conduct of our business and our financial reporting,
·
Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing the member's independent judgment to be subordinated,
·
Respect the confidentiality of information acquired in the course of work, except when authorized or legally obtained to disclosure such information,
·
Share knowledge and maintain skills relevant to carrying out the member's duties within our company,
·
Proactively promote ethical behavior as a responsible partner among peers and colleagues in the work environment and community,
·
Achieve responsible use of and control over all assets and resources of our company entrusted to the member, and
·
Promptly bring to the attention of the Chief Executive Officer any information concerning (a) significant deficiencies in the design or operating of internal controls which could adversely to record, process, summarize and report financial date or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting or internal controls.
We will provide a copy of the Code of to any person without charge, upon request. Requests can be sent to China Nuvo Solar Energy, Inc., 319 Clematis Street, Suite 703, West Palm Beach, Florida 33401.
Corporate Governance
There have been no material changes to procedures by which security holders may recommend nominees to our board of directors.
We currently have no standing audit or nominating committees of our board of directors. Our entire board of directors currently performs these functions. While we currently have no standing audit or nominating committee, we have determined that Mr. Perkins would be considered an audit committee financial expert.
Director Independence
Our board of directors currently has two directors and has no standing sub-committees at this time due to the associated expenses and the small size of our board. We are not currently listed on a national securities exchange that has requirements that a majority of the board of directors be independent.
In performing the functions of the audit committee, our board oversees our accounting and financial reporting process. In this function, our board performs several functions. Our board, among other duties, evaluates and assesses the qualifications of the Company’s independent auditors; determines whether to retain or terminate the existing independent auditors; meets with the independent auditors and financial management of the Company to review the scope of the proposed audit and audit procedures on an annual basis; reviews and approves the retention of independent auditors for any non-audit services; reviews the independence of the independent auditors; reviews with the independent auditors and with the Company’s financial accounting personnel the adequacy and effectiveness of accounting and financial controls and considers recommendations for improvement of such controls; reviews the financial statements to be included in our annual and quarterly reports filed with the Securities and Exchange Commission; and discusses with the Company’s management and the independent auditors the results of the annual audit and the results of our quarterly financial statements. While we do not currently have a standing compensation committee, our non-employee director considers executive officer compensation, and our entire board participates in the consideration of director compensation. Our non-employee board members oversee our compensation policies, plans and programs. Our non-employee board members further review and approve corporate performance goals and objectives relevant to the compensation of our executive officers; review the compensation and other terms of employment of our Chief Executive Officer and our other executive officers; and administer our equity incentive and stock option plans. Each of our directors participates in the consideration of director nominees. In addition to nominees recommended by directors, our board will consider nominees recommended by shareholders if submitted in writing to our secretary. Our board believes that any candidate for director, whether recommended by shareholders or by the board, should be considered on the basis of all factors relevant to our needs and the credentials of the candidate at the time the candidate is proposed. Such factors include relevant business and industry experience and demonstrated character and judgment.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION.
(a)
General.
The following tables set forth all of the compensation awarded to, earned by or paid to:
In Table (1): (i) each individual serving as our principal executive officer during the fiscal years ended July 31, 2011 and 2010; (ii) each other individual that served as an executive officer at the conclusion of the fiscal year ended July 31, 2011 and who received in excess of $100,000 in the form of salary and bonus during such fiscal year.
(c)
Summary compensation tables.
Table 1. Summary Compensation of Executive Officers
(1)
Based on an accrual of $10,000 per month. During the fiscal year ended July 31, 2011 Mr. Fong received cash compensation of $73,400 and also converted $75,665 to 25,000,000 shares of common stock at an average price of $0.003 per share. Mr. Fong is owed $243,935 at July 31, 2011.
(2)
Amount reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended July 31, 2011 and 2010, in accordance with SFAS 123(4) of stock option awards. Assumptions used in calculating these amounts are included in Note 6 to our audited financial statements for the fiscal year ended July 31, 2011, which are included elsewhere in this report.
(e)
Narrative disclosure to summary compensation table.
There are no written agreements with respect to the employment of any of our executive officers.
In August 2007, the Board of Directors approved a bonus plan for Mr. Fong through which Mr. Fong is to be paid an annual bonus equal to 2.5% of the increase in market capitalization for the Company’s common stock. There was no bonus accrued or paid for the fiscal years ended July 31, 2011 or 2010.
On August 10, 2009, the Board of Directors granted 2,000,000 options to purchase shares of common stock under our 2007 Stock Option Plan (the “2007 Plan”) to Mr. Fong and 900,000 options to purchase shares of common stock under the 2007 Plan to Mr. Hollander. The options granted have an exercise price of $0.01 per share (the market price of our common stock on the date of the grant) and expire August 10, 2019. These options were valued using the Black-Scholes option pricing model and determined to have a value of $20,000 and $9,000 respectively for Mr. Fong and Mr. Hollander; which amounts are included as “Option Awards” in the Summary Compensation Table for the fiscal year ended July 31, 2010.
Beginning in July 2007, our board of directors authorized a management fee of $10,000 per month for Mr. Fong. This amount is accrued and paid as cash flow permits. As of July 31, 2009, Mr. Fong was owed $243,935 in accrued but unpaid management fees.
The Company currently does not have any full-time employees other than its officers. Subsequent to the Share Exchange Agreement, the Company has month-to-month arrangements whereby it pays as cash flow permits; Mr. Toland $10,000 a month for his services as Chief Executive Officer and President, Mr. Dutch $10,000 per month for his services as Chief Operating Officer and Mr. Hollander $10,000 per month for his services as Chief Financial Officer.
(f)
Outstanding equity awards at fiscal year end table.
The following table sets forth information regarding each unexercised option and non-vested stock award held by each of our named executive officers as of July 31, 2011.
(d)
Securities authorized for issuance under equity compensation plans.
We have the following securities authorized for issuance under our equity compensation plans as of July 31, 2011. This includes our 2002 Stock Option Plan, covering up to 1,000,000 shares of our common stock, our 2003 Stock Option Plan covering up to 2,500,000 shares of our common stock and our 2007 Stock Option Plan covering up to 18,000,000 shares of our common stock.
Equity Compensation Plan Information
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
$-0-
Equity compensation plans not approved by security holders
16,500,000
$0.03
5,000,000
Total
16,500,000
$0.03
5,000,000
The purpose of both the 2003 Stock Option Plan and the 2007 Stock Option Plan (together the “Plans”) is to increase shareholder value and to advance the interests of the Company by furnishing a variety of economic incentives designed to attract, retain and motivate employees, directors and consultants. Incentives may consist of opportunities to purchase or receive shares of the Company’s common stock. Grants may include both purchase options as well as direct grants of common shares upon conversion of accrued salaries, bonuses, notes payable, fees or other similar payments due from us to an eligible participant. The Plans are administered by our board of directors which determines the terms of all grants including their term, exercise price and vesting period, if applicable. Generally, grants must be at least 100% of the fair market value of our common stock on the date of grant and may be exercisable for up to ten years.
(k)
Compensation of directors.
We do not pay fees to our directors for attendance at meetings of the board; however, we may adopt a policy of making such payments in the future. We will reimburse out-of-pocket expenses incurred by directors in attending board and committee meetings.
(q)
Additional narrative disclosure.
We currently have no retirement plans or similar benefits for our officers. We also have no contracts or agreements with our officers for payments that may result neither from their resignation, retirement, or other termination, nor in the event of a change in control.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
(a)
Security ownership of certain beneficial owners.
(b)
Security ownership of management.
The following table sets forth information known to the Company with respect to the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of the outstanding common stock of the Company as of November 7, 2011 by: (1) each person known by the Company to beneficially own 5% or more of the Company’s outstanding common stock; (2) each of the named executive officers as defined in Item 402(a)(3); (3) each of the Company’s directors; and (4) all of the Company’s named executive officers and directors as a group. The number of shares beneficially owned is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares.
Name of Beneficial Owner
Number of
Shares of
Common Stock
Beneficially
Owned
Percent of
Common
Stock (1)
Henry Fong
319 Clematis Street, Suite 703
West Palm Beach, FL 33401
65,062,774 (2)
1.2%
Barry Hollander
319 Clematis Street, Suite 703
West Palm Beach, Fl. 33401
9,009,121 (3)
0.2%
Abod Partners, LLC (5)
1499 Blake Street, Suite 10D
Denver, Co. 80202
545,364,919
9.6%
Thomas G. Toland
1301 Dove Street Suite 800
Newport Beach, Ca. 92660
800,291,288
14.1%
Richard Dutch
1301 Dove Street Suite 800
Newport Beach, Ca. 92660
342,982,030
6.0%
MD Capital Advisers, Inc (6)
1301 Dove Street Suite 800
Newport Beach, Ca. 92660
1,074,676,912
19.0%
Core Winner Holdings Limited (7)
1301 Dove Street Suite 800
Newport Beach, Ca. 92660
1,074,676,912
19.0%
All Executive Officers and Directors as a Group (5 persons)
1,211,345,213 (4)
21.4%
__________
(1)
Based on 5,663,518,650 shares of our common stock were outstanding.
(2)
In addition to 1,692,591 shares of common stock, this includes: (i) 3,000,000 shares underlying options granted under our 2007 Stock Option Plan; (ii) 17,930,650 shares of common stock owned by Gulfstream Financial Partners, of which Mr. Fong is the managing partner; (iii) 40,000,000 shares of common stock held by HF Services, LLC., in which Mr. Fong is a managing member; (iv) 439,533 shares of common stock held by another corporation in which Mr. Fong is an 80% shareholder and (v) 1,000,000 shares owned by a dependent of Mr. Fong.
(3)
In addition to 1,609,121 shares of common stock held directly by Mr. Hollander, this includes: (i) 6,000,000 shares of restricted common stock owned by a limited liability company that Mr. Hollander is the managing partner and (ii)1,400,000 shares underlying options granted under our 2007 Stock Option Plan.
(4)
Includes 7,400,000 shares underlying options granted under our 2007 Stock Option Plan.
(5)
Mr. Keith Mazer is the person with voting or dispositive powers with respect to the shares held by Abod Partners, LLC.
(6)
Mr. Derek Cahill is the person with voting or dispositive powers with respect to the shares held by MD Capital Advisors, Inc.
(7)
Mr. Eric Siu is the person with voting and dispositive powers with respect to the shares help by Core Winner Holdings Limited.
(c)
Changes in control.
On September 1, 2011, we entered into and consummated the First Amendment to the Agreement Concerning that Exchange of Securities (the “Share Exchange Agreement”) with SurgLine, Inc., a Nevada corporation (“SurgLine”) and the shareholders of SurgLine.
Pursuant to the Agreement, we agreed to acquire all of the outstanding capital stock of SurgLine in exchange (the “Share Exchange”) for the original issuance of an aggregate of 857,143 shares (the “Exchange Shares”) of the Registrant’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). The Exchange Shares will be issued on a pro rata basis, on the basis of the shares held by such security holders of SurgLine at the time of the Exchange. Further in accordance with the Agreement, and following an amendment of the Registrant’s Articles of Incorporation, the Exchange Shares were converted into 3,817,554,433 shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) equal to 70% of the issued and outstanding Common Stock of the Registrant. Additionally, pursuant to the provisions of the Share Exchange Agreement, the Company issued 163,609,476 restricted shares of Common Stock to the SurgLine shareholders, in satisfaction of the anti-dilution provisions in the Share Exchange Agreement. As a result of the Share Exchange, the Registrant issued a total of 3,981,163,909 shares of its common stock to the SurgLine shareholders and SurgLine became a wholly-owned subsidiary of the Registrant.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
(a)
Transactions with related persons.
During the fiscal year ended July 31, 2011, we issued promissory notes totaling $3,000 to Henry Fong, a director. As of July 31, 2011 we owe Mr. Fong a principal balance of $8,500 with accrued interest of $1,368 at July 31, 2011. The remaining balance outstanding carries an interest rate of 10% and is due on demand.
During the fiscal year ended July 31, 2011 we issued promissory notes totaling $15,200 to corporations controlled by Mr. Fong and repaid $38,760 of notes owed corporations controlled by Mr. Fong. During the fiscal year ended July 31, 2010 we issued promissory notes totaling $29,450 to corporations controlled by Mr. Fong and repaid $7,550 of notes owed Mr. Fong. As of July 31, 2011, we owed the corporations $32,281 in principal and accrued interest of $3,107. The remaining balances on these notes carry an interest rate of 10% and are due on demand.
We previously issued a promissory note with a stated interest rate of 8% per annum in the amount of $17,500, to Richard Perkins, a former director of the Company. This amount remains outstanding at July 31, 2011 as well as accrued and unpaid interest of $3,202. The note is due on demand and at the option of the lender, the principal and any accrued and unpaid interest may be converted to shares of common stock of the Company at $0.01 per share. In addition we owe a limited partnership controlled by Mr. Perkins in the form of a convertible promissory note $125,000 as of July 31, 2011 as well as accrued and unpaid interest of $50,514. The note may be converted at a fifteen percent (15%) discount to the price of any offering the Company does that raises a minimum of $500,000. This note was initially due December 31. 2010 and has been extended to December 31, 2011. There were no additional loans or loan repayments involving these entities during the year ended July 31, 2011.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
R.R. Hawkins & Associates International a PC (f/ka/ Hawkins Accounting, Inc.) served as our certifying accountant for the fiscal years ended July 31, 2011 and 2010.
Audit Fees
Fees for audit services billed for the fiscal year ended July 31, 2011 and 2010 were $31,500 and $31,500 respectively and consisted of (i) audit of the Company’s annual financial statements; (ii) reviews of the Company’s quarterly financial statements; (iii) consultations on financial accounting and reporting matters arising during the course of the audit and reviews.
Audit-Related Fees
There were no other aggregated fees billed in the fiscal years ended July 31, 2011 and 2010 for assurance and related services by the principal accountants that were reasonably related to the performance of the audit or review of the financial statements that were not reported above.
Tax Fees
There were no aggregate fees billed in the fiscal year ended July 31, 2011 and 2010 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
All Other Fees
There were no other fees billed in the fiscal year ended July 31, 2011 and 2010 for any other service provided by R.R. Hawkins accounting.
ITEM 15.
ITEM 15.
EXHIBITS
Exhibits
2.1
Agreement and Plan of Reorganization by and between the Company and Nuvo Solar Energy, Inc. dated April 23, 2007. (incorporated by reference to Company’s Form 8-K filed on May 1, 2007)
2.2
Amendment No. 1 to Agreement and Plan of Reorganization by and between the Company and Nuvo Solar Energy, Inc. dated July 25, 2007. (incorporated by reference to Company’s Form 8-K filed on July 31, 2007)
2.3
Articles of Exchange relating to the share exchange by and between Interactive Games, Inc. and Nuvo Solar Energy, Inc. as filed with the Nevada Secretary of State on July 25, 2007. (incorporated by reference to Company’s Form 8-K filed on July 31, 2007)
2.4
Statement of Share Exchange relating to the share exchange by and between Interactive Games, Inc. and Nuvo Solar Energy, Inc. as filed with the Colorado Secretary of State on July 25, 2007. (incorporated by reference to Company’s Form 8-K filed on July 31, 2007)
22.5
Amended Agreement Concerning the Exchange of Securities by and among the Registrant and SurgLine, Inc. dated September 1, 2011. (incorporated by reference to Company’s Form 8-k filed on September 8, 2011)
3.1
Amended and Restated Articles of Incorporation of Interactive Games, Inc. (incorporated by reference to Company’s Form 8-K filed on July 5, 2007).
3.2
Amended and Restated Bylaws of Interactive Games, Inc. (incorporated by reference to Company’s Form 8-K filed on July 5, 2007).
3.3
Amended and Restated Articles of Incorporation of China Nuvo Solar Energy, Inc. (incorporated by reference to Company’s Form 8-K filed on July 31, 2007)
3.4
Certificate of Designation of Series A Preferred Stock. (incorporated by reference to Company’s Form 8-K filed on July 31, 2007)
4.1
Amended and Restated Certificate of Designation Series A Preferred Stock of China Nuvo Solar Energy, Inc. (incorporated by reference to Company’s Form 8-K filed on July 1, 2011)
34.2
Amended and Restated Articles of Incorporation of China Nuvo Solar Energy, Inc. (incorporated by reference to Company’s Form 8-K filed on September 8, 2011).
4.3
Form of promissory note made by the Company in favor of certain investors in July 2007. (incorporated by reference to Company’s Form 8-K filed on July 31, 2007)
44.4
Form of warrant issued by the Company to certain investors on July 2007. (incorporated by reference to Company’s Form 8-K filed on July 31, 2007)
44.5
Amended and Restated Certificate of Designation Series B Preferred Stock of China Nuvo Solar Energy, Inc. (incorporated by reference to Company’s Form 8-k filed on September 8, 2011)
10.1
Agreement between the Company and Photovoltiacs.com, Inc. dated June 9, 2006, as amended. (incorporated by reference to Company’s Form 8-K filed on July 31, 2007)
14.1
Code of Ethics. (filed herewith)
21.1
List of Subsidiaries. (filed herewith).
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith).
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith).
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith).
32.2
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith).
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA NUVO SOLAR ENERGY, INC.
(Registrant)
Date: November 14, 2011
By: /s/ Thomas G Toland
Thomas G Toland
Principal Executive Officer
By: /s/ Barry S. Hollander
Barry S. Hollander
Principal Financial Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: November 14, 2011
/s/ Henry Fong
Henry Fong
Director
Date: November 14, 2011
/s/ Thomas G. Toland
Thomas G Toland
Director
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE COMPANY
FOR THE YEARS ENDED JULY 31, 2011 AND 2010
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated financial statements:
Consolidated balance sheet
Consolidated statements of operations
Consolidated statement of changes in stockholders' deficit
Consolidated statements of cash flows
-
Notes to consolidated financial statements
-
Board of Directors
China Nuvo Solar Energy, Inc. and subsidiary
West Palm Beach, Florida
Report of Independent Registered Public Accounting Firm
We have audited the balance sheet of China Nuvo Solar Energy, Inc. as of July 31, 2011 and 2010, stockholders’ equity for the years ending July 31, 2011 and 2010, the related statements of operations and cash flows for the years ending July 31, 2011 and 2010 and from April 16, 2006 (date of inception) through July 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Nuvo Solar Energy, Inc. as of July 31, 2011 and 2010, stockholders’ equity for the years ending July 31 2011 and 2010, the related statements of operations and cash flows for the years ending July 31, 2011 and 2010 and from April 16, 2006 (date of inception) through July 31, 2011 in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred net losses since inception, which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
/s/ R.R. Hawkins & Associates International, a PC
November 14, 2011
Los Angeles, CA
11301 W. Olympic Blvd. # 714
Los Angeles, CA 90064
T: 310.553.5707 F: 310.553.5337
www.rrhawkins.com
CHINA NUVO SOLAR ENERY, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
CHINA NUVO SOLAR ENERY, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Changes in Shareholders’ Deficit
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
1.
Organization, basis of presentation and summary of significant accounting policies:
Organization
China Nuvo Solar Energy, Inc. (the “Company”), was formerly known as Interactive Games, Inc., a Nevada Corporation ("Interactive").
Pursuant to an Agreement and Plan of Reorganization dated as of April 23, 2007, as amended on July 25, 2007 (the “Share Exchange”), by and between the Company and Nuvo Solar Energy, Inc., a Colorado corporation (“Nuvo”) incorporated on April 13, 2006, we and Nuvo entered into a share exchange whereby all of the issued and outstanding capital stock of Nuvo, on a fully-diluted basis, was exchanged for like securities of the Company, and whereby Nuvo became our wholly owned subsidiary (the “Share Exchange”). The Share Exchange was effective as of July 25, 2007, upon the completed filing of Articles of Exchange with the Nevada Secretary of State and a Statement of Share Exchange with the Colorado Secretary of State. Contemporaneously with the Share Exchange, we changed our name to “China Nuvo Solar Energy, Inc.”
Immediately prior to the effective time of the Share Exchange, Nuvo had outstanding 5,500,000 shares of its common stock (“Nuvo Common Stock”) and no shares of preferred stock. In accordance with the Share Exchange Agreement, each share of Nuvo Common Stock was acquired by us in exchange for approximately 24.24 shares of our common stock for a total of 133,333,255 shares issued. Accordingly, after giving effect to the Share Exchange, the Company had approximately 189,915,355 shares of Common Stock outstanding immediately following the transaction. The shares issued were valued at approximately $8 million or $.06 per share (the market price of the common stock on the date of issuance). The Company allocated the value of the shares to goodwill as the fair value of the liabilities assumed exceeded the fair value of the assets acquired. Management has determined that as of July 31, 2007 the goodwill amount of $8 million was impaired and recorded the write down of goodwill for the year ending July 31, 2007.
As a result of the Share Exchange, the former Nuvo shareholders together held approximately 66.6% of the Company’s outstanding common stock immediately following the transaction, on a fully-diluted basis. Accordingly, the Share Exchange constituted a change of control of the Company. As a result of the Share Exchange, Nuvo constituted the accounting acquirer in the Share Exchange; however, we elected to have a July 31 fiscal year end, which is the same fiscal year end that Interactive Games, Inc. had prior to the Share Exchange.
In June 2007, our stockholders, through a written consent executed by stockholders holding a majority of the outstanding shares of our common stock entitled to vote, adopted and approved Amended and Restated Articles of Incorporation and ratified the Amended and Restated Bylaws of the Company, which were adopted by our board of directors on June 26, 2007.
The Amended and Restated Articles of Incorporation increased the authorized capital stock of the Company from 105,000,000 shares to 500,000,000 shares, of which 25,000,000 shares now may be preferred stock having the voting powers, designations, preferences, limitations, restrictions and relative rights as determined by the board of directors from time to time.
Nuvo was formed on April 13, 2006 for the purpose of seeking a business opportunity in the alternate energy or “next-generation energy" sector. This industry sector encompasses non-hydro carbon based energy production and renewable energy technologies that are “net-zero" or emissions free.
On September 1, 2011 the Company completed the acquisition of 100% of the common stock of SurgLine, Inc. ("SurgLine"). Pursuant to the terms of the Share Exchange Agreement (see subsequent event footnote #10) SurgLine will become a wholly owned subsidiary of China Nuvo.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
1.
Organization, basis of presentation and summary of significant accounting policies:
(continued)
Pursuant to the Agreement, we agreed to acquire all of the outstanding capital stock of SurgLine in exchange (the “Share Exchange”) for the original issuance of an aggregate of 857,143 shares (the “Exchange Shares”) of the Registrant’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). The Exchange Shares were issued on a pro rata basis, on the basis of the shares held by such security holders of SurgLine at the time of the Exchange. Further in accordance with the Agreement, and following an amendment of the Registrant’s Articles of Incorporation, the Exchange Shares were converted into 3,817,554,433 restricted shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) equal to 70% of the issued and outstanding Common Stock of the Registrant. Additionally, pursuant to the provisions of the Share Exchange Agreement, the Company issued 163,609,476 restricted shares of Common Stock to the SurgLine shareholders, in satisfaction of the anti dilution provisions in the Share Exchange Agreement. As a result of the Share Exchange, the Registrant issued a total of 3,981,163,909 shares of its common stock to the SurgLine shareholders and SurgLine became a wholly-owned subsidiary of the Registrant.
Going concern and management’s plans
The Company had a working capital deficit of approximately $1,645,000 at July 31, 2011. Additionally, the Company to date has generated minimal revenues. Accordingly, the Company has no ready source of working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. While management believes the Company may be able to raise funds through the issuance of debt or equity instruments, there is no assurance the Company will be able to raise sufficient funds to operate in the future. The debt financing may include loans from our officers and directors. Although our balance sheet includes current liabilities of approximately $1,695,000, a portion of this amount are in the form of a derivative liability of $475,789 and convertible notes of $300,000 (of which $125,000 is a related party). These amounts, plus other related party loans of approximately $116,000 and accrued and unpaid interest may be converted to common stock, thereby reducing considerably our debt service obligations. Nevertheless, we will be required to raise funds in order to fund our operations and costs associated with being a public company.
As part of our initial planned operations, our main focus was to be the development of a viable manufacturing process for our technology. As discussed in Footnote 8, we initially planned that our arrangement with PMI would provide us with the facilities and expertise in China necessary to develop a pilot manufacturing process and eventually, a full manufacturing facility assuming the pilot process is successful. Since this has not been successful we are continuing to develop our business plan. We do not intend to enter into any additional direct development of our technology. Rather, we plan to become an incubator of the solar technology we currently own and technology that we may acquire in the future. We currently do not have any agreements to acquire any additional technology. In order to acquire additional technology we would either have to raise additional money through equity or debt financing or in the alternative issue shares of our common stock. We intend to study the feasibility of sub-licensing or entering into other types of agreements with third parties, whereby the third party will compensate us by paying a license fee and subsequent royalties. The compensation may be in the form of cash or in the licensee’s common stock. Through our established relationships we plan to focus on the identification, acquisition and potential license or resale of renewable and alternative energy technologies. If we conclude that we are not able to acquire any additional technology, we may decide to longer be in the solar technology sector and may seek to merge with another entity in another industry.
On September 1, 2011 the Company completed the acquisition of 100% of the common stock of SurgLine, Inc. ("SurgLine"). Pursuant to the terms of the Share Exchange Agreement (see subsequent event footnote #8) SurgLine will become a wholly owned subsidiary of China Nuvo. We will require additional capital for general corporate working capital to fund our day-to-day operations and costs associated with being a publicly-traded company. We presently believe the source of funds will primarily consist of debt financing, which may include debt instruments that may include loans from our officers or directors, or the sale of our equity securities in private placements or other equity offerings or instruments.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
1.
Organization, basis of presentation and summary of significant accounting policies: (continued)
Basis of presentation
The consolidated financial statements for the year ending July 31, 2011 and 2010 include the accounts of the Company and our wholly owned subsidiary Nuvo. All of the intercompany accounts have been eliminated in consolidation. Certain reclassifications to amounts reported in the July 31, 2010 consolidated financial statements have been made to conform to the July 31, 2011 presentation. On April 29, 2011 we sold the shares we owned of our majority owned subsidiary Interactive Entertainment Group, Inc, (f/k/a/ Interactive Games, Inc.) a Florida Corporation (“IGAM”).
Significant accounting policies:
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results will differ from those estimates.
Intellectual Property
The Company records intangible assets in accordance with Statement of Financial Accounting Standard (SFAS) Number 142, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets deemed to have indefinite lives are not subject to annual amortization. Intangible assets which have finite lives are amortized on a straight line basis over their remaining useful life; they are also subject to annual impairment reviews. Upon the review as of July 31, 2010, the Company determined that their Intellectual Property has been permanently impaired and accordingly has expenses a total of $333,403 for the year ended July 31, 2010, included in other expenses.
Revenue recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”. This statement established that revenue can be recognized when persuasive evidence of an arrangement exists, the services have been delivered, all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is reasonably assured.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration on credit risks
The Company is subject to concentrations of credit risk primarily from cash and assets from discontinued operations.
The Company minimizes its credit risks associated with cash, including cash classified as assets from discontinued operations, by periodically evaluating the credit quality of its primary financial institutions.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
1.
Organization, basis of presentation and summary of significant accounting policies: (continued)
Significant accounting policies
Stock-based compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (“SFAS No, 123R”). SFAS No. 123R establishes the financial accounting and reporting standards for stock-based compensation plans. As required by SFAS No. 123R, the Company will recognize the cost resulting from al stock-based payment transactions including shares issued under its stock option plans in the financial statements.
Prior to January 1, 2006, the Company accounted for stock-based employee compensation plans (including shares issued under its stock option plans) in accordance with APB Opinion No. 25 and followed the pro forma net income, pro forma income per share, and stock-based compensation plan disclosure requirements set forth in the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). The Company granted options to purchase 10,000,000 shares of common stock, of which 9,800,000 were granted to Directors and Officers. The options have an exercise price of $0.01 (the market price of the common stock on the date of the grant) and expire in August 2019. The options were valued at $100,000 based upon the Black-Scholes option pricing model. The options were fully vested at the date of the grant and therefore the Company included $100,000 of stock based compensation for the year ended July 31, 2010. There are 18,225,000 stock options and warrants outstanding at July 31, 2011.
Fair value of financial instruments
The carrying value of cash, assets of discontinued operations, accounts payable and accrued expenses approximate their fair value due to their short-term maturities. The carrying amount of the note payable and due to related parties approximate their fair value based on the Company's incremental borrowing rate.
Income taxes
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or all of the deferred tax asset will not be realized.
Loss per common share
Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants and common stock underlying convertible promissory notes at July 31, 2011 and 2010 were 357,696,527 and 394,846,418, respectively, are not considered in the calculation as the impact of the potential common shares would be to decrease loss per share and therefore no diluted loss per share figures are presented.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
1.
Organization, basis of presentation and summary of significant accounting policies: (continued)
Accounting for obligations and instruments potentially settled in the Company’s common stock
In connection with any obligations and instruments potentially to be settled in the Company's stock, the Company accounts for the instruments in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock. This issue addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's stock.
Under EITF 00-19, contracts are initially classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially measured at fair value and subsequently accounted for based on the then current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long as the contracts continue to be classified as equity. For contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification of a contract is reassessed at each balance sheet date.
Derivative instruments
In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative instruments under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
Recent accounting pronouncements
In February 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-09, "Amendments to Certain Recognition and Disclosure Requirements" ("ASU 2010-09"), which is included in the FASB Accounting Standards Codification (the "ASC") Topic 855 (Subsequent Events). ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events hrough the date that the financial statements are issued. ASU 2010-09 is effective upon the issuance of the final update and did not have a significant impact on the Company's financial statements.
In January 2010, the FASB issued ASU No. 2010-06, "Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"), which is included in the ASC Topic 820 (Fair Value Measurements and Disclosures). ASU 2010-06 requires new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. ASU 2010-06 also requires disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements and clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009.
In August 2009 the FASB issued Accounting Standards Update ("ASU") No. 2009-05 "Amendments to Certain Recognition and Disclosure Requirements", ("ASU 2009-05") which is included in the ASC Topic 820 (Fair Value Measurements and Disclosures). ASU 2009-05 provides clarification that the fair value measurement of liabilities in which a quoted price in an active market for the identical liability is not available should be developed based on a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or another valuation technique that is consistent with the principles of Topic 820. ASU 2009-05 also clarifies that there is no requirement to adjust the fair value related to the existence of a restriction that prevents the transfer of the liability and that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. ASU 2009-05 was effective for the Company as of October 31, 2009 and did not have a significant impact on the Company's financial statements.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
1.
Organization, basis of presentation and summary of significant accounting policies: (continued)
Recent accounting pronouncements (continued)
In June 2009, the FASB issued guidance now codified as ASC 105, Generally Accepted Accounting Principles as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP, aside from those issued by the SEC. ASC 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. The adoption of ASC 105 did not have a material impact on the Company's financial statements, but did eliminate all references to pre-codification standards.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
2.
Accrued liabilities, related parties:
Accrued liabilities, related parties at July 31, 2011 and 2010 are as follows:
Officer bonus
$
-
$
275,561
Management fees
313,029
633,650
Accrued interest
63,034
60,959
Affiliated Companies
1,450
-
$
377,514
$
970,170
3.
Convertible debentures payable:
On October 21, 2007 the Board of Director of the Company authorized the sale of up to $700,000 of 6% unsecured convertible debentures (the “2007 Debentures”). During the year ended July 31, 2008, the Company executed a Securities Purchase Agreement with various accredited investors, whereby the Company sold in the aggregate $505,000 of the 2007 Debentures. We received net proceeds of $429,350 after $75,650 of debt issuance costs (included in the accompanying balance sheet), paid to Divine Capital Markets, LLC, who acted as our placement agent. The debt issuance costs will be amortized as debt issuance costs over the three year term of the 2007 Debentures. The fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 2007 Debentures. The change in the fair value of the liability will be credited or (charged) to other income or (expense) in the consolidated statement of operations. The beneficial conversion feature included in the 2007 Debentures resulted in an initial debt discount of $505,000 and an initial loss on the valuation of derivative liabilities of $219,878. Based on the revaluation of the 2007 Debentures at July 31, 2011, the Company recorded an expense of $63,559 and increased the derivative liability on the balance sheet by $63,559, resulting in a derivative liability balance of $222,456 for the 2007 debentures as of July 31, 2011.
The Debentures are due three years from the final Closing Date under the Purchase Agreement (the “Maturity Date”), unless prepayment of the Debentures is required in certain events, as described below. The Debentures are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Corporation’s common stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Debentures provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Corporation or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Corporation.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
3.
Convertible debentures payable: (continued)
The outstanding principal balance of each Debenture bears interest, in arrears, at six percent (6%) per annum, payable (i) upon conversion, or (ii) on the Maturity Date, in shares of our common stock at the Conversion Price. Upon the occurrence of an Event of Default (as defined in the Purchase Agreement), then the Corporation is required to pay interest to the Holder of each outstanding Debenture, at the option of the Holders (i) at the rate of lesser of eighteen percent (18%) per annum and the maximum interest rate allowance under applicable law, and (ii) the Holders may at their option declare the Debentures, together with all accrued and unpaid interest (the “Acceleration Amount”), to be immediately due and payable.
The Corporation may at its option call for redemption all or part of the Debentures prior to the Maturity Date, as follows:
The Debentures called for redemption shall be redeemable for an amount (the “Redemption Price”) equal to (x) if called for redemption prior to the date which is nine months from the date of issuance (the “Issuance Date”), 115%, if called for redemption on or after the date that is nine months after the Issuance Date but prior to the first anniversary of the Issuance Date, 131%, in either case of the principal amount called for redemption, plus (y) interest accrued through the day immediately preceding the date of redemption.
(i)
If fewer than all outstanding Debentures are to be redeemed, then all Debentures shall be partially redeemed on a pro rata basis.
In connection with the Purchase Agreement, the Company entered into a Registration Rights Agreement, dated as of October 31, 2007 (“Registration Rights Agreement”), with the Holders of the Debentures to provide certain registration rights under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations thereunder. Pursuant to the Registration Rights Agreement, the Company contemplates making an offering of common stock (or other equity securities convertible into or exchangeable for common stock) registered for sale under the Securities Act or proposes to file a Registration Statement covering any of its securities other than (i) a registration of Form S-8 or S-4, or any successor or similar forms; and (ii) a shelf registration under Rule 415 for the sole purpose of registering shares to be issued in connection with the acquisition of assets, the Company will at each such time give prompt written notice to the Holders’ representative and the Holders of its intention to do so. Upon the written request of any Holder made within thirty (30) days after the receipt of any such notice, the Company has agreed to use its best efforts to effect the registration of all such registrable securities which the Company has been so requested to register by the Holders, to the extent requisite to permit the disposition by the requesting Holders of their registrable securities pursuant to the Registration Statement.
The Company determined that the conversion feature of the 2007 Debentures represents an embedded derivative since the 2007 Debentures are convertible into a variable number of shares upon conversion. Accordingly, the convertible Debentures are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The Company believes that the aforementioned embedded derivatives and freestanding warrants meet the criteria of SFAS 133 and EITF 00-19, and should be accounted separately as derivatives with a corresponding value recorded as a liability. Accordingly, the fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 2007 Debentures. Such discount will be accreted from the date of issuance to the maturity date of the 2007 Debentures. The change in the fair value of the liability for derivative contracts will be credited to other income (expense) in the consolidated statements of operations. The $505,000 face amount of the 2007 Debentures were stripped of their conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds to the conversion option would be attributed to the debt. The beneficial conversion feature (an embedded derivative) included in the 2007 Debenture resulted in an initial debt discount of $505,000 and an initial loss on the valuation of derivative liabilities of $210,878. Based on the revaluation of the 2007 Debentures at July 31, 2011, the Company recorded an expense of $63,559 and increased the derivative liability on the balance sheet by $63,559 for the year ended July 31, 2011.
The Company issued 1,500,000 shares of its common stock to Divine and/or its designees as consideration for its services as the placement agent in connection with the financing transaction described above.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
3.
Convertible debentures payable: (continued)
2010-2011 Convertible Notes
During the year ended July 31, 2011, the Company entered into eight separate note agreements with institutional investors for the issuance of eight convertible promissory notes in, for a total at July 31, 2011 of $206,000 in principal outstanding (together, the “2010-2011 Convertible Notes”).
Among other terms, the 2010-2011 Convertible Notes mature on their nine month anniversary(together, the “Maturity Dates”), unless prepayment of the 2010-2011 Convertible Notes is required in certain events, as called for in the agreements. The 2010-2011 Convertible Notes are convertible at a conversion price (the “Conversion Price”) for each share of common stock equal to 50% of the average of the lowest three trading prices per share of the Company’s common stock for the ten (10) trading days immediately preceding the date of conversion. In addition, the 2010 Convertible Notes provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Company or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Company.
The Convertible Notes each bears interest at eight percent (8%) per annum, payable in cash or shares of our common stock at the Conversion Price. Upon the occurrence of an Event of Default (as defined in the 2010-2011 Convertible Notes), the Company is required to pay interest to the Holder of each outstanding note at twenty-two percent (22%) per annum and the Holders may at their option declare the 2010-2011 Convertible Notes, together with all accrued and unpaid interest, to be immediately due and payable.
The Company may at its option prepay the 2010-2011 Convertible Notes in full during the first ninety days following their issuance in an amount equal to 150% of the outstanding principal and interest, and during the 91st to 180th days following the Notes in an amount equal to 175% of the outstanding principal and interest. Further terms call for the Company to maintain shares reserved for issuance as stated in the 2010-2011 Convertible Notes.
We received net proceeds from the 2010-2011 Convertible Notes of $188,500 after debt issuance costs of $17,500 paid for lender legal fees. These debt issuance costs will be amortized over the terms of the 2010-2011 Convertible Notes or such shorter period as the 2010-2011 Convertible Notes may be outstanding. Accordingly, as the 2010-2011 Convertible Notes are converted to common stock prior to their expiration date, that amount of debt issuance costs attributable to the amounts converted will be accelerated and expensed as of the applicable conversion dates. As of July 31, 2011, $9,583 of these costs had been expensed as debt issuance costs.
We have determined that the conversion feature of the 2010-2011 Convertible Notes represents an embedded derivative since the 2010-2011 Convertible Notes are convertible into a variable number of shares upon conversion. Accordingly, the convertible 2010-2011 Convertible Notes are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The Company believes that the aforementioned embedded derivatives meet the criteria of ASC 815 (formerly SFAS 133 and EITF 00-19), and should be accounted separately as derivatives with a corresponding value recorded as a liability. Accordingly, the fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 2010-2011 Convertible Notes. Such discount will be accreted from the date of issuance to the maturity dates of the 2010-2011 Convertible Notes. The change in the fair value of the liability for derivative contracts will be credited to other income (expense) in the consolidated statements of operations at the end of each quarter. The $206,000 face amount of the 2010-2011 Convertible Notes were stripped of their conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds to the conversion option attributed to the debt. The beneficial conversion feature (an embedded derivative) included in the 2010-2011 Convertible Notes resulted in an initial debt discount of $193,931 and an initial loss on the valuation of derivative liabilities of $186,659 for a derivative liability balance of $380,590 at issuance.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
3.
Convertible debentures payable: (continued)
The fair value of the 2010-2011 Convertible Notes was calculated at issue date utilizing the following assumptions:
Issuance Date
Fair Value
Term
Assumed
Conversion
Price
Market Price on
Issue Date
Volatility Percentage
Interest Rate
12/3/2010
$32,931
9 months
$0.00136
$0.0024
141%
4.72%
1/7/2011
$70,000
9 months
$0.0008
$0.0024
251%
4.72%
2/22/11
$75,000
9 months
$0.001
$0.0041
158%
4.72%
3/12/11
$33,333
9 months
$0.0015
$0.0037
156%
4.72%
3/29/11
$65,446
9 months
$0.00128
$0.0041
156%
4.72%
5/16/11
$40,000
9 months
$0.002
$0.0055
156%
4.72%
7/22/11
$16,260
9 months
$0.00123
$0.0023
186%
4.72%
7/29/11
$47,619
9 months
$0.00105
$0.0023
185%
4.72%
At July 31, 2011, the Company revalued the derivative liability balance of the remaining outstanding 2010-2011 Convertible Notes. Therefore, for the period from their issuance to July 31, 2011, the Company has recorded an expense and increased the previously recorded liabilities by $63,220 resulting in a derivative liability balance of $253,333 at July 31, 2011.
The fair value of the 2010-2011 Convertible Notes was calculated at July 31, 2011 utilizing the following assumptions:
Fair Value
Term
Assumed
Conversion Price
Volatility Percentage
Interest Rate
$393,999
9 months
$0.00105
184%
4.72%
The following table summarizes the balance sheet amounts as of July 31, 2011, as well as the amounts included in the consolidated statement of operations for the year ended July 31, 2011.
Balance Sheet
Debentures
Debt issuance costs
Derivative liability
Face value of Debentures
Discount on Debentures
$
-
$
222,456
$
158,500
$
-
2010-2011
7,919
253,333
133,000
83,822
$
7,919
$
475,789
$
291,500
$
83,822
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
4.
Convertible and other promissory notes and long-term debt, including related parties:
Convertible and other promissory notes and long-term debt, including related parties at July 31, 2011 and 2010 consist of the following:
Notes payable
$
183,259
$
211,559
Notes payable, related parties [A]
233,281
317,231
Convertible debentures, net of discount of $83,822 (2011) and $31,356 (2010)
207,678
173,644
$
624,218
$
702,434
Less current portion
624,218
528,790
Long-term debt, net of current portion
$
-
$
173,644
[A]
The following table summarizes the activity of notes payable, related parties for the year ended July 31, 2011:
Balance, August 1, 2010
$
317,231
Issuance of new notes
18,200
Repayment of notes
Notes converted to common stock
Notes of minority owned interest sold
(38,760)
(32,955)
(30,435)
Balance July 31, 2011
$
233,281
5.
Stockholders’ deficit:
Preferred Stock
On November 30, 2010, the Company filed a Certificate of Amendment to Certificate of Designations for its Series A Preferred Stock whereby the Company and the holders of the Series A Preferred stock agreed to extend the Mandatory Conversion date for the Series A Preferred Stock to November 30, 2013. Additionally, the holders of the Series A Preferred were granted voting rights, whereby the shares of preferred stock held are eligible to vote on an as if converted basis pursuant to the conversion terms in the Certificate of Designation of Designation of Series A Preferred Stock on matters presented for a vote by the Company's stockholders. Effective on November 30, 2010, the Company issued upon the conversion of $275,541 in debt payable to the Company's Chief Executive Officer, 160,000 shares of its Series A Preferred Stock. As of July 31, 2011 there are 224,473 shares of Series A Preferred stock outstanding.
Common Stock
Effective December 1, 2010, the stockholders of the Company through a written consent executed by stockholders holding 59% of the outstanding shares of the Company’s preferred and common stock entitled to vote, adopted and approved the Amended and Restated Articles of Incorporation, which were adopted by the Company’s board of directors on November 30, 2010. In addition, stockholders authorized the Company’s officers, in their discretion, to take any and all actions as they deem necessary, advisable or appropriate in order to effectuate any potential business opportunity, including without any limitation, executing and delivering such agreements, instruments and documents contemplated by any agreement that the Company may enter into, and performing any obligations of the Company thereunder, including without limitation any reverse stock split and increase in authorized shares of the Company.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
5.
Stockholders’ deficit: (continued)
On December 1, 2010, the Company filed Amended and Restated Articles of Incorporation with the Secretary of State of Nevada, pursuant to which the Company increased the authorized capital stock of the Company from 500,000,000 shares to 1,500,000,000 shares par value $0.001, of which 25,000,000 shares may be preferred stock having the voting powers, designations, preferences, limitations, restrictions and relative rights as determined by the board of directors from time to time.
Shares issued for conversion of subordinated debentures and accrued interest
On December 9, 2010 the Company issued 11,442,360 shares of common stock upon the conversion of $12,500 of debentures and $5,522 of unpaid interest on the debentures. The shares were issued at approximately $0.001575 per share.
From May 1, 2011 through July 31, 2011 the Company issued 79,508,834shares of common stock upon the conversion of $107,000 of debentures and $12,720 of unpaid interest on the debentures. The shares were issued at an average conversion price of $0.001485 per share.
Shares issued for conversion of series A Preferred Stock
On February 2, 2011, the Company issued 18,390,805 shares of common stock upon the conversion of 20,000 shares of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended the shares were issued at approximately $0.001087 per share.
On February 14, 2011 the Company issued 36,936,879 shares of common stock upon the conversion of 39,938 shares of Series A Preferred stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.001081 per share.
On April 1, 2011 the Company issued 10,949,427 shares of common stock upon the conversion of 28,651 shares of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.001337 per share.
From May 1, 2011 through July 31, 2011 the Company issued 137,022,337 shares of common stock upon the conversion of $161,110 shares of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.00175 per share.
Issuances of shares of common stock to affiliated parties
On February 14, 2011 the Company issued 22,000,000 shares of common stock upon the conversion of $32,955 of notes payable. The shares were issued at an average price of approximately $0.0015 per share.
On March 31, 2011 and April 18, 2011 the Company issued a total of 25,000,000 shares of restricted common stock to an officer and director of the Company in satisfaction of $76,665 of amounts owed. The shares were issued at an average price of approximately $.003 per share.
On July 6, 2011 the Company issued 28,000,000 shares of restricted common stock to a former officer of the Company in satisfaction of $38,500 of amounts owed. The shares were issued at an approximately $.001375 per share.
Other issuance of shares of common stock
From December 21, 2010 to January 7, 2011 the Company issued 34,500,000 shares of common stock upon the conversion of $33,300 of notes payable. The shares were issued at an average price of approximately $0.00096 per share.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
5.
Stockholders’ deficit: (continued)
On February 14, 2011, the Company issued 13,266,666 shares of common stock pursuant to Debt Settlement and Release Agreements in exchange for the cancellation of $19,900 of notes and accrued liabilities. The shares were issued at $0.0015, the price of the common stock on the date the parties had agreed to the settlements.
On April 11, 2011 the Company issued 10,000,000 shares to a consultant. The Company valued the shares at $.004, (the price of the common stock on the date of the agreement) and recorded an expense of $40,000 for the year ended July 31, 2011.
Stock options and warrants
In March 2002, the Company adopted the 2002 Stock Option Plan, covering up to 1,000,000 shares of the Company's common stock, and in July 2003, the Company adopted the 2003 Stock Option Plan covering up to 2,500,000 shares of the Company's common stock. There are currently no options outstanding under the 2002 stock Option Plan and 300,000 under the 2003 Stock Option Plans. In August 2007, the Company adopted the 2007 Stock Option Plan covering up to 18,000,000 shares of the Company’s common stock. On August 10, 2009 the Company granted options to purchase 10,000,000 shares of the Company’s common stock under the 2007 Plan. The options have an exercise price of $0.01 (the market price of the common stock on the date of the grant) and expire in August 2019. The options were valued at $100,000 based upon the Black-Scholes option pricing model. As of July 31, 2011 there were options to purchase 16,500,000 shares of the Company’s common stock outstanding under the 2007 Stock Option Plan. Additionally, the Company has warrants outstanding to purchase 1,000,000 shares of common stock
A summary of the activity of the Company’s outstanding options and warrants during the teo years ended July 31, 2011 is as follows:
Options and warrants
Weighted average exercise price
Outstanding August 1, 2009
13,037,107
$
0.09
Granted
10,000,000
0.01
Exercised
-
-
Expired
4,812,107
0.10
Outstanding, August 1, 2010
18,225,000
$
0.04
Granted
-
-
Exercised
-
-
Expired
725,000
0.08
Outstanding and exercisable at
July 31, 2011
17,500,000
$
0.04
Range of
exercise prices
Warrants
outstanding
and exercisable
Weighted average
Remaining
contractual life
Weighted average
exercise price
$.01
10,000,000
4.59
$0.01
0.07
6,500,000
2.35
0.07
0.12
1,000,000
0.02
0.12
The weighted average remaining contractual life of the terms of the warrants and options is 6.9 years.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
5.
Stockholders’ deficit: (continued)
The fair value of options granted during the year ended July 31, 2010 to purchase our common stock were estimated on the date of the grant using the Black-Scholes Option Pricing Model with the following assumptions:
Expected dividend yield
0%
Expected stock price volatility
310%
Risk free interest rate
4.72%
Expected life of options
2 years
Minority Interest
In December 2007, the Financial Accounting Standards Board (FASB) issued new guidance which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income (loss) attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance requires that the noncontrolling interest continue to be attributed its share of losses even if that attribution results in a deficit.
Utilizing this guidance we have classified the noncontrolling interest in IGAM in stockholders’ equity on our Consolidated Balance Sheets on a retrospective basis. In addition, consolidated net loss has been adjusted to include the net loss attributed to the noncontrolling interest in IGAM, through April 29, 2011, the date we sold the stock we owned to a third party. The company recognized a gain on the sale of $493,454.
6.
Agreements:
On June 9, 2006 Nuvo signed a license agreement with Photovoltaics.com, Inc. (“PV”), Hutchinson Island, Florida. Nuvo acquired exclusive worldwide rights to PV's solar cell technology relating to a multiple stacked solar cell using wave guide transfers (the “Solar Technology”). This license agreement includes all patents issued pursuant to certain patent applications or amendments that have been filed and the rights to use all applicable copyrights, trademarks and related intellectual property obtained on or in connection with the process and products. As consideration for this license, Nuvo paid a total aggregate license fee of $250,000. The term of the license is for 10 years, automatically renewable for successive ten year terms under the same terms and conditions as provided for in this agreement. As of July 31, 2010 the Company has been unable to commercialize the license and management believes the asset has been permanently impaired and accordingly has expensed the remaining $145,834 of the intellectual property acquired, and such amount is included in other expenses for the year ended July 31, 2010. Nuvo also agreed to pay PV a fee of $180,000 over the first three years of the agreement to act as a consultant.
On January 23, 2008, the Company purchased from PV the patents related to the solar technology in exchange for 2,000,000 restricted shares of common stock of the Company. The Company now owns all rights, title and interest in the patents, including all issued patents or other intellectual property arising from the patents worldwide. The Company valued the common stock at $0.075 per share (the market price of the common stock on November 16, 2007, the date the parties agreed to the number of shares to be issued) and initially, increased its intellectual property by $150,000. As of July 31, 2010 the Company reviewed this asset and as part of the review determined that since the Company has not been able to commercialize the technology and is currently not pursuing the commercialization of the technology that the asset has been permanently impaired. Accordingly, the Company has recorded an impairment expense of $150,000, included in other expenses for the year ended July 31, 2010.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
6.
Agreements: (continued)
On November 27, 2007, we executed a Collaboration and Development Agreement (the “Collaboration Agreement”) with Pioneer Materials, Inc. (“PMI”) of Torrance, California. Under the terms of the Agreement, PMI was to build, equip, operate and manage, for our benefit, a product development, testing and prototype manufacturing facility in PMI’s Chengdu, Sichuan, China facility located in Chengdu’s West High Tech development zone. The agreement with PMI has the objective to develop, test and manufacture prototypes of solar energy products using our licensed technology based on an invention titled “Photovoltaic cell with integral light transmitting waveguide in a ceramic sleeve”. In May of 2008, the Chengdu region of China experienced a catastrophic earthquake. As a result of this earthquake and the after effects including significant problems with the delivery of electricity, PMI suspended their development work for a significant period of time. We are no longer continuing to work with PMI under the Collaboration Agreement, as there has been no progress on product development. We have discontinued the monthly payments, as PMI has not been able to continue its development work and accordingly the Company does not anticipate that there will be any future compensation to PMI.
On December 10, 2008 we executed a Patent and Trademark Purchase Agreement (the “Purchase Agreement”) with PV. Nuvo acquired certain patent rights and trademarks in exchange for $39,900. Accordingly, the Company increased its intellectual property by $39,900 which was initially included in the balance sheet. Through July 31, 2010 the Company had amortized $2,331 of the $39,900. As of July 31, 2010 the Company has been unable to commercialize the license and management believes the asset has been permanently impaired and accordingly has expensed the remaining $37,569 of the intellectual property acquired, and such amount is included in other expenses for the year ended July 31, 2010.
.
7.
Income taxes:
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred taxes, as of July 31, 2011, are as follows:
Deferred tax assets:
Net operating loss carryforward
$
$ 336,000
Less valuation allowance
(336,000)
Total net deferred tax assets
$
-
The Company may have had a change of ownership as defined by the Internal Revenue Code Section 382. As a result, a substantial annual limitation may be imposed upon the future utilization of its net operating loss carryforwards. At this point, the Company has not completed a change in ownership study and the exact impact of such limitations is unknown. The company has no accrued tax liability, as the income was derived from the sale of a subsidiary and the liabilities were alleviated through formal bankruptcy proceedings.
The federal statutory tax rate reconciled to the effective tax rate during the year ended July 31, 2011 and 2010, respectively, is as follows:
Tax at U.S. Statutory Rate
35.0%
35.0%
State tax rate, net of federal benefits
5.0%
5.0%
Change in valuation allowance
(40.0)
(40.0)
0.0%
0.0%
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
8. Subsequent events
Share Exchange Transaction with SurgLine, Inc.
On September 1, 2011, the Company entered into and consummated the First Amendment to the Agreement Concerning that Exchange of Securities (the “Share Exchange Agreement”) with SurgLine, Inc., a Nevada corporation (“SurgLine”) and the shareholders of SurgLine. Upon consummation of the transactions set forth in the Agreement (the “Closing”), the Company adopted the business plan of SurgLine.
Pursuant to the Agreement, the Company agreed to acquire all of the outstanding capital stock of SurgLine in exchange (the “Share Exchange”) for the original issuance of an aggregate of 857,143 shares (the “Exchange Shares”) of the Registrant’s Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”). The Exchange Shares will be issued on a pro rata basis, on the basis of the shares held by such security holders of SurgLine at the time of the Exchange. Further in accordance with the Agreement, and upon the effectiveness of the increase in the authorized shares of capital stock of the Company following an amendment of the Company’s Articles of Incorporation, the Exchange Shares were converted into 3,817,554,433 restricted shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) equal to 70% of the issued and outstanding Common Stock of the Company. Additionally, pursuant to the provisions of the Share Exchange Agreement, the Company issued 163,609,476 restricted shares of Common Stock to the SurgLine shareholders, in satisfaction of the anti-dilution provisions in the Share Exchange Agreement. As a result of the Share Exchange, SurgLine became a wholly-owned subsidiary of the Company. The Agreement contains customary representations, warranties and covenants of the Company and SurgLine for like transactions. The Share Exchange was effective upon the completed filing of Articles of Exchange with the Secretary of State of Nevada. The foregoing descriptions of the above referenced agreements do not purport to be complete. For an understanding of their terms and provisions, reference should be made to the Agreement attached as Exhibit 10.1 to the Current Report on Form 8-K filed on September 7, 2011.
Additionally, the Company has agreed to issue 142,857 shares of its Series B Preferred Stock to Abod Partners, LLC. (“Abod”). Abod has acted as a consultant to the Company in facilitating the Agreement by and among the Company and SurgLine. Upon the effectiveness of the increase in the authorized shares of capital stock of the Company, the 142,857 shares of Series B Preferred Stock were exchanged for 545,364,919 restricted shares of our Common Stock.
On September 1, 2011, as a covenant to the Agreement, holders of a majority of the Company’s outstanding Common Stock voted to amend the Registrant’s Articles of Incorporation to increase the number of its authorized shares of capital stock from 1,500,000,000 shares to 6,500,000,000 par value $0.001 shares (the “Amendment”) of which (a) 6,475,000,000 shares were designated as Common Stock and (b) 25,000,000 shares were designated as blank check preferred stock.
At the effective time of the Exchange, our board of directors and officers was reconstituted by the resignation of Henry Fong as President and Chief Executive Officer of the Company and the appointment of Thomas G. Toland as a member of the Company’s Board of Directors, President and Chief Executive Officer and Richard Dutch as Secretary and Chief Operating Officer of the Company.
Management performed an evaluation of the Company’s activity through the date these financials were issued to determine if they must be reported. The Management of the Company determined that there were no other reportable subsequent events to be disclosed
Common Stock Issuances
In August and September 2011, the Company issued 57,894,167 shares of common stock upon the conversion of $64,473 of Series A Preferred Stock. Pursuant to the Certificate of Designation of the Preferred Stock, as amended, the shares were issued at approximately $0.0011 per share.
From August 1, 2011 through October 31, 2011 the Company issued 159,852,426 shares of common stock upon the conversion of $146,686 of debentures and unpaid interest on the debentures. The shares were issued at an average conversion price of $0.0009 per share.
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED JULY 31, 2011 AND 2010
8. Subsequent events (continued)
On October 20, 2011 the Company issued 76,677,667 shares of common stock pursuant to a Debt Settlement and Release Agreement in exchange for the cancellation of $43,007 of accounts payable. The shares were issued at $0.0006 per share.