TABLE OF CONTENTS

 

See notes to consolidated  financial statements.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JuneSeptember 30, 2010

(Unaudited)

The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q.  In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of JuneSeptember 30, 2010 and the results of operations and cash flows for the periods ended JuneSeptember 30, 2010 and 2009. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited.  The results for the sixnine months ended JuneSeptember 30, 2010 is not necessarily indicative of the results to be expected for any subsequent periods of the entire year ending December 31, 2010.  The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations.  These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2009 as included in our report on Form 10-K.

Universal Solar Technology, Inc. (the “Company”) is a Nevada corporation in the development stage. It is engaged in the manufacture and distribution of Silicon ingots, wafers, solar cells, modules, and other PV application products. The Company was incorporated under the laws ofin the State of Nevada on July 24, 2007.  ItThe Company operates through its wholly-owned subsidiaries, including Kuong U Science & Technology (Group) Ltd. (“KUST”Kuong U”), a company incorporated in Macau, Peoples Republic of China (“PRC”) on May 10, 2007, and Nanyang Universal Solar Technology Co., Ltd. (“NUST”), a company incorporated in Nanyang, PRC on September 8, 2008.  On May 9th, 2008, theThe Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (SEC), and raised capital of $300,000 from a self-underwritten offering of 2,000,000 shares of our common stock.sells solar photovoltaic (“PV”) modules.

The consolidated financial statements include the accounts of the Company and all of its subsidiaries.  All significant inter-company accounts and transactions have been eliminated. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

The reporting currency of the Company is U.S. dollars (USD).the United States dollar. The functional currency of KUSTKuong U is the Hong Kong dollars (HKD).dollar. The functional currency of NUST is Renminbi (RMB)the Chinese Yuan (”RMB”).  The subsidiaries’ functional currencies have beenRevenue and expense accounts of our two subsidiaries are translated into USD for reporting purpose.

The RMB relatedis not freely convertible into foreign currency and all foreign exchange transactions must take place through PRC authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates appliedused in the translation.

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

Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by shareholders and distributions to shareholders.  Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income (loss) are required to be reported in a financial statement that is presented with the same prominence as other financial statements.  Comprehensive income includes net income (loss) and the foreign currency translation adjustment, net of tax.

In June 2009, FASB established Accounting Standards Codification TM (“ASC”) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformityOn July 2, 2010, NUST signed a short term loan agreement for RMB 5 million with the GAAP. The Codification supersedes all non-SEC accountingFangcheng County Hong Yu Industrial Development and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification non-authoritative. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted the new guidance for the quarter endedInvestment Company. By September 30, 2009, which changed2010, NUST has received the way we reference accounting standards in our disclosures. Adoptiontotal cash amount of RMB 5 million. According to the loan agreement, NUST agrees to pay interest at the interest rate of 4.425% per month. The maturity date of the Codification did not have any impact on the Company’s results of operations or financial position.loan is 12/31/2010.

On May 5, 2010, NUST amended the previous oral loan agreement with Yuemao Technology and formed a Line of Credit Agreement. By JuneSeptember 30, 2010, NUST has received the total cash amount of RMB 26,670,000.26,470,000. According to the Line of Credit Agreement, NUST may continue to borrow from Yuemao Technology at the interest rate of 1 percent per annum, NUST promises to pay the principal and the interest balance by 12/1/2013.

On May 5, 2010, KUST amended the previous oral loan agreement with Yuemao Laser Technology and formed a Line of Credit Agreement. By JuneSeptember 30, 2010, KUST has received the total cash amount of HKD 1,914,979.1,925,353.  According to the Line of Credit Agreement, KUST may continue to borrow from Yuemao Technology at the interest rate of 1 percent per annum, KUST promises to pay the principal and the interest balance by 12/1/2013.

On May 5, 2010, KUST amended the previous oral loan agreement with Mr. Wenshen Cheng and formed a Line of Credit Agreement. By JuneSeptember 30, 2010, KUST has received the total cash amount of HKD 23,480,825.23, 681,566. According to the Line of Credit Agreement, KUST may continue to borrow from Mr. Wenshen Chen at the interest rate of 1 percent per annum, KUST promises to pay the principal and the interest balance by 12/1/2013.

On May 5, 2010, the Company amended the previous oral loan agreement with Mr. Wenshen Cheng and formed a Line of Credit Agreement. By JuneSeptember 30, 2010, Universal Solar Technology has received the total cash amount of HKDUSD 22,485. According to the Line of Credit Agreement, Universal Solar Technology may continue to borrow from Mr. Wenshen Chen at the interest rate of 1 percent per annum, Universal Solar Technology promises to pay the principal and the interest balance by 12/1/2013.

Both Yuemao Laser and Yuemao Technology are PRC companies and controlled by the Company’s chairman and chief executive officer.

The Company has not recorded a provision for United States federal income tax for the periods presented since it incurred net losses in such periods.

The Company’s Chinese subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning private enterprises, which are generally subject to tax at a statutory rate of 25% on taxable income.

As of JuneSeptember 30, 2010, the Company had approximately $1,381,722$1,546,599 of net operating loss carry forwards for income tax purposes in the United States.purposes.

Based on management's present assessment, the Company has not determined it to be more likely than not that a deferred tax asset attributable to the future utilization of the net operating loss carryforwardcarry forward as of JuneSeptember 30, 2010 will be realized. Accordingly, the Company has provided a 100% allowance against the deferred tax asset in the financial statements at JuneSeptember 30, 2010. The Company will continue to review this valuation allowance and make adjustments as appropriate.

The Company signed of a sales contract for $32,600,000 withOn August 23, 2010, Universal Solar Technology, Inc. (the "Company") provided notice to C.T.O. spol.s.r.o. Group, part of, spol. s.r.o. to terminate the largest electricity producer in the Czech Republic. The contract callsSales Contract entered into on June 18, 2010 for the deliverysale of 20MW of monocrystalinemonocrystalline solar modules for an aggregate sales price of $32,600,000. The Company terminated the Sales Contract as a result of CTO's failure to be delivered bymake required payment under the endSales Contract.

In accordance with ASC 855, “Subsequent Events”, the Company has evaluated subsequent events that have occurred through the date of 2010. After signingissuance of these financial statements and has determined that there were no material events that occurred after the contract, C.T.O. requested to amend the contract and delay the payment. As of today, we have not received the deposit of 15%date of the total amount of the sales contract from our counter party.balance sheets included in this report.

The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.

This document contains certain forward-looking statements, which are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Terms such as “anticipate”, “may”, “will”, “should”, “believe”, “estimate”, “expect”, “intend”, “plan”, predict”, “project”, “target”, “will likely result”, “will continue” and similar expressions are intended to identify forward-looking statement and based upon our expectations at the time they made. The forward-looking statements are not guarantee for future performance and actual results may differ from those indicated or implied in the forward-looking statements due to a various factors including, but not limited to changes to our assumptions, risks and uncertainties involved, many of which are beyond our control. We discuss risks and uncertainties in great details under item IA1A “Risk Factors” below.

The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing in Part I, Item 1 and elsewhere in this report. The Company’s fiscal year end is December 31.

We are a development stage enterprise that manufactures silicon ingots, wafers, high efficiency solar photovoltaic (“PV”) modules and other PV application products in the EU, North America, Asia and Africa.  The Company was incorporated under the laws of the State of Nevada on July 24, 2007. It operates through its wholly-owned subsidiaries, including Kuong U Science & Technology (Group) Ltd. (“KUST”), a company incorporated in Macau, Peoples Republic of China (“PRC”) on May 10, 2007, and Nanyang Universal Solar Technology Co., Ltd. (“NUST”), a company incorporated in Nanyang, PRC on September 8, 2008. On May 9th, 2008, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (SEC), and raised capital of $300,000 from a self-underwritten offering of 2,000,000 shares of our common stock.

The company’sCompany’s focus during 2010 has been on completing the development of its Nanyang factory. The new factory covers an area of 7133771,337 square meters in Nanyang City, Henan province. Upon full completion,Our new factory is one of the Nanyang factory willlargest in its kind in China. We produce silicon ingots, silicon wafers, PV modules, on-grid and off-grid generating systems. We also have advanced manufacturing technologiesthe ability to produce the equipment such as ingots puller, and equipments. We expect thatdownstream products such as solar lamps for road and highway infrastructures. Our production capacity is 15 MW in September and we target to reach to 50 MW by the end of the year. As of today, we have completed testing of 9 ingot growers and continue to acquire more equipment to expand the production volume. During the third quarter of 2010 we have accepted delivery of water cooling system, multi-wire saw and framing machine. We have hired a total of 158 employees as of September 30, 2010.

We have built an assorted product portfolio to serve the Nanyang factory will have annual production capacitydiverse needs of up to 50MWglobal customers. Products currently being marketed, and/or developed include: silicon ingots, 20MWsilicon wafers, PV modules, on-grid generating systems, off-grid power, solar wafers,lamps for road and 30 MWhighway infrastructure, solar PV modules.LED home accessories, and solar handheld device chargers (iPods, cameras, etc.) Our products have passed multiple standard tests and achieved the certificates of VDE, TUV, IEC61215, IEC 61730, CE and ISO 9001:2000.

TheOur cost of sales was $598,721 for the three monthsquarter ended JuneSeptember 30, 2010 andcompared to $29,989 for the three monthsquarter ended JuneSeptember 30, 2009 were both zero, as we had no2009. The increase in cost of sale was due to the increased sales for reasons stated above.volume during the third quarter of 2010.

Gross profit is affected by numerous factors, including our average selling prices, foreign exchange rates, our manufacturing costs and the effective utilization of our production facilities. Because we had no sales for reasons discussed aboveOur gross profit was $10,779 for the three monthsquarter ended JuneSeptember 30, 2010 andcompared to $1,620 for the three monthsquarter ended JuneSeptember 30, 2009, we had no gross profits during those periods.an increase of 565% compared to $1,620 for the quarter ended September 30, 2009. The increase was due to increased sales volume. Our profit margin is about the industry average.

Net interest expense was $17,358$28,082 for the three months ended JuneSeptember 30, 2010, compared to $11,566$55,869  for the three months ended JuneSeptember 30, 2009, an increasea decrease of $5,792$ 27,787  or 50%49.7%. The majoritydecrease of the $17, 358 interest expense was attributable to thelower interest expense on the loansrate from related parties. Theparties, offsetting the impact of increase in interest expense is due to increasedof borrowing from to related parties.

Foreign currency gain (loss) consists of gains and losses resulting from holding assets and liabilities and conducting transactions denominated in currencies other than our functional currencies. During the three months ended JuneSeptember 30, 2010, we recognized a foreign currency translation gain of $16,878,$22,063, compared to $438$45 for the three months ended JuneSeptember 30, 2009 an increase of $16,440 or 3,753%.$22,018. The increase in foreign currency translation gain was mainly due to the fluctuation between US Dollar and Chinese Yuan during the reporting period.

Affected by the significant price decrease for solar products, it was not cost effectiveOur revenue for the Company to sell products manufactured by a related party as it has done in the past. As a result, there were no revenues recognized during the sixnine months ended JuneSeptember 30, 2010 was $609,500 compared to $660,051$691,660 for the sixnine months ended JuneSeptember 30, 2009, a decrease of $82,160 or 12%. Last year our revenue was mainly generated from our major two customersexport of solar PV modules manufactured by a related party. Instead,to our customers in India; while this year we sold our wafers to seven Chinese companies. The decrease in revenue was mainly due to the Company has focused its efforts on completing the construction of its manufacturing facilities in orderlower gross margin for silicon wafers as compared to become more vertically integrated. As a vertically integrated company, we will be able to increase the profit margin of our products and sell our products at lower prices.PV modules.

The cost of sales for the sixnine months ended JuneSeptember 30, 2010 was zero, as we had no sales, comparing$598,721, compared to $589,460$619,449 for the sixnine months ended JuneSeptember 30, 2009 which constitutesconstituted a 100%3.3% decrease. The cost of sales in the amount of $589,460 was the cost associated with the solar PV modules manufactured by a related party which was sold by KUST.

Gross profit is affected by numerous factors, including our average selling prices, foreign exchange rates, our manufacturing costs and the effective utilization of our production facilities. Our gross profit for the sixnine months ended JuneSeptember 30, 2010 was zero,$ 10,779, compared to $70,591$72,211 for the sixnine months of 2009 because we had no sales for reasons discussed above.

Selling, general and administrative expense consists primarily of salaries and other personnel-related costs, professional fees, advertisement, and other selling expenses. It was $350,815$498,340 for the sixnine months ended JuneSeptember 30, 2010, compared to $162,197 for$282,615for the same period in 2009, an increase of $188,618$215,725 or 116%.76.3 %. The increase was mainly associated with the expenses related to the increase in personnel from 4 to 114158 related to the new manufacturing facilities in Nanyang. We expect these expenses to increase further in the near future, both in absolute dollars and as a percentage of net sales, in order to support the completion of manufacturing construction, installation of equipment, improvement of our information processes and systems, compliance and other infrastructure required for a public company.

Net interest expense was $102,667$130,749 for the sixnine months ended JuneSeptember 30, 2010, compared to $19,805$75,674 for the sixnine months ended JuneSeptember 30, 2009, an increase of $82,862$55,075 or 418%72.8%. The majority of the interest expense was attributable to the interest expense on the loans from related parties and the increase was due to increased borrowing from related parties.parties, offsetting by lower interest rate on such borrowings starting from May 5, 2010

Net loss for the sixnine months ended JuneSeptember 30, 2010 was $456,256$621,133 compared to $113,830$288,486 for the same period in 2009, an increase of $342,426$332,647 or 301%115%. The increase was due to the increase of increase in payroll expenses as a result of a significant increase in employees as a result of the large hiring to staff our new manufacturing facilities in Nanyang. The number of employees has increase from 4 to 114158 at the end of the second quarter of 2010 compared to the same period a year ago. As discussed above, the newly hired employees are still in training and we expect as the new employees complete their training and begin production, our productivity and sales would increase.

 

Our operation is primarily funded through paid-in capital and short term and long term loans from the related parties. As of JuneSeptember 30, 2010, we had $911,276$126,125 in cash, cash equivalents and marketable securities, compared with $1,115,047 ended December 31, 2009. We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, operating results and cash flows.

For the sixnine months ended JuneSeptember 30, 2010, cash used in operating activities was $828,391$ 1,044,407 compared with $115,447$163,147 used during the sixnine months ended JuneSeptember 30, 2009. This was primarily attributable to cash used in prepaid expenses, other current assets and inventory. Offset to the increase was an increase in imputed interest on advances from related parties and interest payable on long term loans from related parties of $44,374$ 44,899 and $57,945$ 76,253 respectively and net increase in accounts payable, advances from customers and accrued expenses of $230,735.$1,032,533.

For the sixnine months ended June,September, 2010, cash used in investment activities was $906,502$2,300,517 compared to $285,271$1,531,339 for the sixnine months ended JuneSeptember 30, 2009. The increase iswas primarily related to cash paid as deposits for future deliveries of equipment and acquisition of property and equipment as a result of a series equipment purchases for our new manufacturing facilities in Nanyang.supporting business establishment and future growth.

FinancingFinancial activities provided net cash inflow of $1,524,273$2,343,756 during the first sixnine months of 2010 as compared to $612,685$2,883,004 for the same period in 2009.

On July 2, 2010, NUST signed a short term loan agreement for RMB 5 million with Fangcheng County Hong Yu Industrial Development and Investment Company. By September 30, 2010, NUST has received the total cash amount of RMB 5 million. According to the loan agreement, NUST agrees to pay interest at the interest rate of 4.425% per month. The increase was due to increased borrowingmaturity date of the loan is 12/31/2010.

As of September 30, 2010, we had long term liability in the total amount of $7,358,022, which were loans from related parties. Since the management controls 95% of the shares, our short term goal for financing activity is to identify credible financial partners who has strong interest in the Chinese solar industry. As of today, the company is in the negotiation process with a few Private Equity groups. The company may continuemajority of our debt is due to borrow from the related parties, which are also controlled by our CEO.  Our CEO is willing to financeconvert most of our debt (the outstanding balance due to the related parties) into equity any time when the company meets its financing goal to expand the production capacity to 200 MW per year. Under the current letter of credits with the related parties, the annual interest rate is 1%, which is much lower than the prevailing interest rate. The motivation of lending to the company at such a low interest rate is not to collect the financing profit from interest payments, but to invest in the growth of the Company. The same model may be applied for the future development.investors as well. The company has no doubt that it will meet its interest payment obligations.       

As of JuneSeptember 30, 2010, we havehad not entered into any financial guarantees or other commitments to guarantee the payment obligations of any other parties. We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, operating results and cash flows.

The recent and unprecedented disruption in the credit markets has had a significant impact on a number of financing activities. Additional financing is desirable within the next 9 months in order to meet our current and projected cash flow deficits from business operations and future development. We will continue to seek financing from related parties and other sources.

As of June 30, 2010, our saleliquidity and marketing efforts such as participating in international trade shows and increasing our sales staff in order to generate sales. We entered into a sales contract with C.T.O., spol. s.r.o. on June 18, 2010 to sell 20MW of monocrystalline solar modules for an aggregate sales price of $32,600,000. Although pursuant to the agreement 15% of the aggregate sales price was due on June 28, 2010, to date wecapital resources have not received any paymentbeen materially adversely impacted and there is no guarantywe believe that we ever will.they will not be materially adversely impacted in the near future.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were operating effectively.

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the Company’s internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, during the fiscal quarter covered by this report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The inherent limitations of the control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives are being met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

As of this quarter reported ended JuneSeptember 30, 2010, there is no pending litigation made against Universal Solar Technology, Inc. In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, routine employment matters.

There havehas been no material changes fromchange in the Company’s risk factors as previously disclosed in our annual reportthe Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2010.

 

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