China TMK Battery Systems Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
For the Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Cash Flows From
Operating Activities
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
|
(1,467,367)
|
|
$
|
1,331,646
|
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation expense
|
|
17,505
|
|
|
52,780
|
|
|
Common stocks
for services provided
|
|
856,250
|
|
|
-
|
|
|
Deferred income
|
|
(9,238
|
)
|
|
-
|
|
|
Change in fair
value of embedded derivative
|
|
1,725,233
|
|
|
-
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
(2,645,680
|
)
|
|
(258,247
|
)
|
|
Advance to
suppliers
|
|
(130,653
|
)
|
|
(118,660
|
)
|
|
Inventories, net
|
|
295,135
|
|
|
(431,414
|
)
|
|
Account
payable - trade
|
|
1,509,993
|
|
|
1,172,094
|
|
|
Accrued
liabilities and other payables
|
|
(210,925
|
)
|
|
486,490
|
|
|
Customer
deposits
|
|
91,871
|
|
|
220,668
|
|
|
Other
assets
|
|
(58,519
|
)
|
|
|
|
|
Prepaid
expenses and other receivables
|
|
(1,007,486
|
)
|
|
(20,550
|
)
|
|
Wages
payable
|
|
(50,855
|
)
|
|
43,966
|
|
|
Various
taxes payable
|
|
(62,514
|
)
|
|
186,568
|
|
|
Net cash
provided by (
used in) operating activities
|
|
(1,147,250
|
)
|
|
2,665,341
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From
Investing Activities
|
|
|
|
|
|
|
|
Change in
restricted cash
|
|
(96
|
)
|
|
(298,360
|
)
|
|
Purchases and
advances of property and equipment
|
|
(2,701,485
|
)
|
|
(5,257,505
|
)
|
|
Deposit for Hualian
acquisition
|
|
(3,172,656
|
)
|
|
-
|
|
|
Collection of
advances/loans - related parties
|
|
-
|
|
|
10,806
|
|
|
Advances/loans -
related parties
|
|
-
|
|
|
(153,277
|
)
|
|
Collection of
short-term loan receivable
|
|
-
|
|
|
747,697
|
|
|
Net cash used in
investing activities
|
|
(5,874,237
|
)
|
|
(4,950,639
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From
Financing Activities
|
|
|
|
|
|
|
|
Borrowing from bank
notes
|
|
-
|
|
|
2,930,200
|
|
|
Repayment of bank
notes
|
|
-
|
|
|
(1,069,523
|
)
|
|
Borrowing from bank
loans
|
|
1,973,161
|
|
|
7,206,677
|
|
|
Repayment of bank
loans
|
|
(2,887,878
|
)
|
|
(3,925,527
|
)
|
|
Common stock
subscribed
|
|
1,989,748
|
|
|
-
|
|
|
Net proceeds from
share issuance
|
|
6,302,953
|
|
|
-
|
|
|
Distribution to
former owners
|
|
(1,510,000
|
)
|
|
(1,476,622
|
)
|
|
Proceeds from
related parties
|
|
1,120,611
|
|
|
-
|
|
|
Repayment to
related parties
|
|
(17,691
|
)
|
|
-
|
|
|
Net cash provided
by financing activities
|
|
6,970,904
|
|
|
3,665,205
|
|
|
|
|
|
|
|
|
|
|
Effect of
exchange rate changes on cash
|
|
154,354
|
|
|
(276,092
|
)
|
|
Net increase in cash and cash equivalents
|
|
103,771
|
|
|
1,103,815
|
|
|
Cash and cash
equivalents, beginning of period
|
|
185,590
|
|
|
186,463
|
|
|
Cash and cash
equivalents, end of period
|
$
|
289,361
|
|
$
|
1,290,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure information:
|
|
|
|
|
|
|
|
Income taxes paid
|
$
|
339,411
|
|
$
|
460
|
|
|
Interest paid
|
$
|
241,907
|
|
$
|
219,252
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
8
China TMK Battery System, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: DESCRIPTION OF BUSINESS AND
ORGANIZATION
China TMK Battery System Inc. (“TMK US”, or
“the Company”) (formerly Deerfield Resource, Ltd.) was incorporated under the
laws of the State of Nevada on June 21, 2006. On February 10, 2010, we entered
into and closed the Share Exchange Agreement with Leading Asia, a BVI company,
and its sole stockholder, Unitech, a BVI company, pursuant to which we
acquired 100% of the issued and outstanding capital stock of Leading Asia in
exchange for 25,250,000 shares of our common stock, par value $0.001, which
constituted 90.18% of our issued and outstanding capital stock on a
fully-diluted basis as of and immediately after the consummation of the
transactions contemplated by the Share Exchange Agreement.
In connection with the reserve acquisition
of Leading Asia, Deerfield also entered into the Cancellation Agreement with
United Fertilisers, its controlling stockholder, whereby United Fertilisers
agreed to the cancellation of 272,250,000 shares of China TMK's common stock
owned by it. As a condition precedent to the consummation of the Share
Exchange Agreement, on February 10, 2010, China TMK also entered into a
termination and release agreement with ASK Prospecting & Guiding Inc.,
pursuant to which Deerfield terminated that certain Mineral Claim Purchase
Agreement, dated as of October 10, 2006. On February 10, 2010, Deerfield
Resources, Ltd. changed its name to "China TMK Battery Systems Inc." to more
accurately reflect its new business operations.
The transaction has been treated as a
recapitalization of Leading Asia and its subsidiaries, with China TMK Battery
Systems Inc. (the legal acquirer of Leading Asia and its subsidiaries,
including the consolidation of the TMK Power Industries Ltd.) considered the
accounting acquiree, and Leading Asia whose management took control of China
TMK Battery Systems Inc. (the legal acquiree of Leading Asia) considered the
accounting acquirer. The Company did not recognize goodwill or any intangible
assets in connection with the transaction. All costs related to the
transaction are being charged to operations as incurred. The 25,250,000 shares
of common stock issued to the shareholders and designees of China TMK BVI in
conjunction with the Share Exchange have been presented as outstanding for all
periods. The historical consolidated financial statements include the
operations of the accounting acquirer for all periods presented.
TMK US, through its wholly-owned subsidiary
in the People’s Republic of China (“PRC”), is engaged in the research,
development, production, marketing and sales of environment-friendly batteries
including nickel metal hydride batteries.
TMK US and its subsidiaries - Leading Asia
Pacific Investment Limited, Good Wealth Capital Investment Limited, TMK Power
Industries (SZ) Co., Ltd., and Borou Industrial Co., Ltd – are collectively
referred to as the “Company.”
NOTE 2: RESTATEMENT
The financial statements for the
quarter ended March 31, 2010 filed with the SEC on May 24, 2010 contained an
error related to the accounting treatment of certain reset provisions in
warrants to purchase
3,401,320 shares of
the Company’s common stock (the “Warrants”),
previously issued to investors in a February 10, 2010 private placement (the
“Private Placement”). The Warrants issued in the Private Placement include an
anti-dilution provision for adjustment
if the Company issues or sells
any shares of common stock or securities convertible into common stock for a
consideration per share of common stock less than the then current exercise
price, which is currently $1.60 per
share for
private placement investors and $1.25 per share for Hudson Securities, Inc.
and SHP Securities LLC. Because of the reset provision, the Warrants are not
considered to be indexed to the Company’s stock and therefore the
Warrants were determined to be derivative liability under ASC 815-15 and ASC
815-20.
The question was raised in light of EITF
07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to
an Entity’s Own Stock” (FASB ASC 815-15) effective as of January 1, 2009,
which outlines new guidance for being indexed to an entity’s own stock and the
resulting liability or equity classification based on that conclusion.
At March 31, 2010, the
derivative liability had a fair value of $2,943,977, which was determined
using the Multinomial Lattice models. The multinomial lattice models that
value the derivative liability within the warrants are based on a probability
weighted discounted cash flow model. The warrants were valued with the
following assumptions: at February 10, 2010: annual volatility of 73%; term of
5 years; risk free rate of 2.39%; target exercise price of $2.50 for the $1.25
warrants and $3.00 for the $1.60 warrants; at March 31, 2010: annual
volatility of 61%; term of 4.87 years; risk free rate of 2.34%; target
exercise price of $2.50 for the $1.25 warrants and $3.00 for the $1.60
warrants.
In addition, the weighted
average number of common shares outstanding is being restated to correct a
clerical error.
The impact of the error on the
March 31, 2010 financial statements is reflected in the following tables:
|
|
|
Originally
|
|
|
|
|
|
|
|
|
|
|
Filed
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
$
|
-
|
|
|
2,943,977
|
|
$
|
2,943,977
|
|
|
Total Liabilities
|
|
21,906,078
|
|
|
2,943,977
|
|
|
24,850,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
11,737,406
|
|
|
(1,218,744
|
)
|
|
10,518,662
|
|
|
Retained earnings (unrestricted)
|
|
11,817,894
|
|
|
(1,725,233
|
)
|
|
10,092,661
|
|
|
Total stockholders' equity
|
|
23,622,079
|
|
|
(2,943,977
|
)
|
|
20,678,102
|
|
|
Total Liabilities & Stockholders' Equity
|
$
|
45,528,157
|
|
|
|
|
$
|
45,528,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originally
|
|
|
|
|
|
|
|
|
|
|
Filed
|
|
|
Adjustment
|
|
|
Restated
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of embedded derivative
|
|
-
|
|
|
(1,725,233
|
)
|
|
(1,725,233
|
)
|
|
Total
other expenses
|
|
(302,288
|
)
|
|
(1,725,233
|
)
|
|
(2,027,521
|
)
|
|
Income (loss) before income taxes
|
|
616,041
|
|
|
(1,725,233
|
)
|
|
(1,109,192
|
)
|
|
Net income (loss)
|
$
|
257,866
|
|
|
(1,725,233
|
)
|
$
|
(1,467,367
|
)
|
|
Comprehensive income (loss)
|
$
|
290,084
|
|
|
(1,725,233
|
)
|
$
|
(1,435,149
|
)
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
26,472,055
|
|
|
3,734,056
|
|
|
30,206,111
|
|
|
Diluted
|
|
26,849,979
|
|
|
4,460,335
|
|
|
31,310,314
|
|
|
Earnings (loss) per share - Basic
|
$
|
0.01
|
|
|
(0.06
|
)
|
|
(0.05
|
)
|
|
Earnings (loss) per share - Diluted
|
$
|
0.01
|
|
|
(0.06
|
)
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originally
|
|
|
|
|
|
|
|
|
|
|
Filed
|
|
|
Adjustment
|
|
|
Restated
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
257,866
|
|
$
|
(1,725,233
|
)
|
$
|
(1,467,367
|
)
|
|
Adjustments to reconcile net income to net
cash
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of embedded derivative
|
|
-
|
|
|
1,725,233
|
|
|
1,725,233
|
|
|
Net cash provided by (used in)
operating
activities
|
|
(1,147,250
|
)
|
|
|
|
|
(1,147,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(5,874,237
|
)
|
|
|
|
|
(5,874,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
6,970,904
|
|
|
|
|
|
6,970,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
154,354
|
|
|
|
|
|
154,354
|
|
|
Net increase in cash and
cash
equivalents
|
|
103,771
|
|
|
|
|
|
103,771
|
|
|
Cash and cash equivalents, beginning of
period
|
|
185,590
|
|
|
|
|
|
185,590
|
|
|
Cash and cash equivalents, end of
period
|
$
|
289,361
|
|
|
|
|
$
|
289,361
|
|
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
a.
Basis of preparation
The consolidated financial statements have
been prepared in accordance with U.S. GAAP for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation SX.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company for the year ended December
31, 2009 and notes thereto contained in our Registration Statement on Form S-1
filed with the United States Securities and Exchange Commission (the “SEC”) on
May 24, 2010. Interim results are not necessarily indicative of the results
for the full year.
b.
Foreign currency translation
The functional currency of the Company is
Renminbi (“RMB”). The Company maintains its financial statements using the
functional currency. Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet dates. Transactions
denominated in currencies other than the functional currency are translated
into the functional currency at the exchange rates prevailing at the dates of
the transaction. Exchange gains or losses arising from foreign currency
transactions are included in the determination of net income (loss) for the
respective periods.
9
For financial reporting purposes, the
financial statements of TMK Shenzhen and Borou, which are prepared in RMB, are
translated into the Company’s reporting currency, United States Dollars
(“USD”). Balance sheet accounts are translated using the closing exchange rate
in effect at the balance sheet date and income and expense accounts are
translated using the average exchange rate prevailing during the reporting
period. Adjustments resulting from the translation, if any, are included in
accumulated other comprehensive income (loss) in stockholder’s equity.
The exchange rates used for foreign currency
translation were as follows (USD$1 = RMB):
|
Period Covered
|
|
Balance Sheet Date Rates
|
|
|
Average Rates
|
|
|
|
|
|
|
|
|
|
|
Year ended December
31, 2009
|
|
6.83720
|
|
|
6.82082
|
|
|
Quarter ended March
31, 2009
|
|
6.84556
|
|
|
6.82547
|
|
|
Quarter ended March
31, 2010
|
|
6.83620
|
|
|
6.81896
|
|
The exchange rates used for foreign currency
translation were as follows (USD$1 = HKD):
|
Period Covered
|
|
Balance Sheet Date Rates
|
|
|
Average Rates
|
|
|
|
|
|
|
|
|
|
|
Year ended December
31, 2009
|
|
7.80000
|
|
|
7.80000
|
|
|
Quarter ended March
31, 2009
|
|
7.80000
|
|
|
7.80000
|
|
|
Quarter ended March
31, 2010
|
|
7.80000
|
|
|
7.80000
|
|
c. Reclassifications
Certain amounts in the consolidated
financial statements for the prior year have been reclassified to conform to
the presentation of the current year for the comparative purposes.
NOTE 4: Acquisition
In January 4, 2010, the Company entered into
a Memorandum of Understanding (MOU) with Hong Shenzhen DongFang Hualian
Technology Ltd. (“Hualian”). The Company paid overall $3.2 million as deposit
during January through March 2010, which shall be withdrawn based upon the MOU
if Hualian fails the due diligence and external auditing which are currently
under process and are expected to be completed by the end of the third quarter
of 2010. In addition, the Company can withdraw the $3.2million deposit if the
2009 net profit of Hualian is less than RMB 28 million (approximately
$4,105,080).
NOTE 5: ADVANCES FOR PROPERTY AND
EQUIPMENT PURCHASE
Advances for property and equipment purchase
consist of the following:
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
Advances for Property
Purchase (1 unit located in Shihao Mansion)
|
$
|
3,024,522
|
|
$
|
3,024,108
|
|
|
Advances for Equipment
Purchase (5 vendors in Q1 2010 and 2 vendors in 2009)
|
|
4,619,233
|
|
|
2,989,816
|
|
|
Advances for Property
Purchase (3rd, 5th and 6th floor located in Jinli Building)
|
|
11,648,988
|
|
|
10,916,096
|
|
|
Total Advances for
Property Purchase
|
$
|
19,292,743
|
|
$
|
16,930,020
|
|
The Company entered into two agreements to
purchase equipment from two vendors in 2009 and three agreements to purchase
equipment from three vendors during first quarter of 2010. Based on the
agreements, the Company is required to pay certain deposits prior to equipment
delivery date. The remaining price is to be paid after trial-run of the
equipment within certain acceptance period. The ownership of equipment will be
transferred to the Company upon the receipt of full purchase price.
10
The Company is in the process of acquiring
several properties and has entered into various property purchase agreements
starting year 2009. These agreements generally require the Company to make
installment payments and the title and possession transfers to the Company
upon the final payment. For the properties listed in the table above, the
final payment had not been made by March 31, 2010 and December 31, 2009 and as
a result, the payments made through those respective dates were not recorded
as properties. No depreciation was recorded related to these advances.
NOTE 6: SHORT-TERM BANK LOANS
Short term bank loans consist of the
following:
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
Bank Loans borrowed
by TMK Shenzhen
|
$
|
|
|
$
|
|
|
|
Bank of China Shenzhen
Branch
|
|
1,717,605
|
|
|
2,382,500
|
|
|
Bank of Ningbo
Shenzhen Branch
|
|
1,151,598
|
|
|
1,170,080
|
|
|
|
|
|
|
|
|
|
|
Bank Loans borrowed
by Borou
|
|
|
|
|
|
|
|
Bank of Ningbo
Shenzhen Branch
|
|
819,168
|
|
|
1,170,080
|
|
|
Short-term loans
|
$
|
3,688,371
|
|
$
|
4,722,660
|
|
On August 24, 2009, Borou obtained a
one-year term loan in the amount of RMB 8,000,000 (or approximately
$1,170,080) from Bank of Ningbo Shenzhen Branch ("BN") bearing interest at
approximately 6.37% with maturity date on August 23, 2010. The loan is
personally guaranteed by Mr. Wu, Henian and Mr. Tu Jun and secured by Mr.
Zhuang, Zehao's personal property. According to the loan agreement, BN has
right to request Borou to repay the outstanding debt in full immediately if
the Company does not meet any of the following: (a) Borou should repay 30% of
principal within 6 months of receipt of the first borrowing; (b) Within term
of loan, Borou should maintain certain amounts of cash deposits and cash
withdrawals with the bank on monthly basis of not less than 30% of its
revenue; (c) The Company as a whole (Borou and TMK Shenzhen)’s total loans
should not exceed $19,013,800 (RMB 130,000,000); (d) The Company as a whole (Borou
and TMK Shenzhen)'s total revenue including VAT tax should not be less than
$51,191,000 (RMB 350,000,000); (e) Borou cannot distribute any dividend or
pledge using its assets, cannot add any additional borrowing within loan
period; (f) Borou's total revenue including VAT tax should be maintained at
not less than $51,191,000 (approximately RMB 350,000,000. Borou has met all of
the above requirements and has repaid principal and interests due through
March 2010, except item (f). BN has not requested Borou to pay off this loan,
however, Borou was not able to obtain a waive letter from BN.
On August 21, 2009, TMK Shenzhen obtained a
one-year term loan in the amount of RMB 8,000,000 (appropriately $1,170,080)
from Bank of Ningbo Shenzhen Branch ("BON") bearing interest at approximately
6.37% with maturity date on August 20, 2010. The loan is personally guaranteed
by Mr. Wu, Henian and secured by Mr. Zhuang, Zehao's personal property.
According to the loan agreement, BN has right to request TMK Shenzhen to repay
the outstanding debt in full immediately if the Company does not meet any of
the following: (a) the Company cannot distribute any bonus or dividend; (b)
The total financing amount cannot exceed $19,013,800 (RMB 130,000,000) and the
total revenue should not be less than $51,191,000 (RMB 350,000,000), the
revenue defined here includes VAT tax). As of the filing date, the Company is
not in violation of any requirements stated above.
On Jun
e 18, 2008, TMK
Shenzhen entered into a credit agreement with Bank of China Shenzhen Branch
(“BOC”) to obtain a line of credit in the amount of RMB 19,000,000
(approximately $2,787,109). The loan bears interest at approximately 5.346%
per annum and matures on June 18, 2010. The loan is personally guaranteed by
Mr. Wu, Henian.
The unused line of credit amounted to
$1,061, 715 and $403,957 at March 31, 2010 and December 31, 2009,
respectively.
11
NOTE 7: LONG-TERM BANK LOANS
Long term bank loans consist of the
following:
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
DBS Bank
|
$
|
2,012,016
|
|
$
|
2,181,753
|
|
|
China Construction Bank Shenzhen Branch
|
|
3,949,560
|
|
|
4,387,800
|
|
|
Bank of China Shenzhen Branch
|
|
5,851,200
|
|
|
5,119,100
|
|
|
Less current portion
|
|
(1,843,165
|
)
|
|
(2,451,700
|
)
|
|
Long -term portion
|
$
|
9,969,611
|
|
$
|
9,236,953
|
|
On November 13, 2009, TMK Shenzhen obtained
a 3-year term loan from DBS Bank (China) Limited Shenzhen Branch (“DBS”) in
the amount of RMB 15,300,000 (approximately $2,237,778) bearing interest at
approximately 130% of the prevailing prime rate at the time of the loan
(approximately 7.02% per annum) paid monthly. The loan can only be used for
equipment purchase (RMB 11,318,500) and working capital purpose (RMB
3,981,500). DBS requires the Company to deposit RMB 3,000,000 (approximately
$438,780) as security (will be refunded to the Company in 6 months if payments
are made on timely basis). Based on agreement, DBS has right to request the
Company to repay the outstanding balance immediately if the Company does not
meet any of the following: (a) the Company should provide audited financial
within six months of year-end; (b) the Company cannot pledge its account
receivables to any other third parties without DBS permission; (c) the
Company's account receivable settlements (cash collections) should be
maintained at RMB 40,000,000 (approximately $5,850,400) annually and RMB
10,000,000 (approximately $1,462,600) quarterly. The Company did not violate
any of the above covenants at March 31, 2010.
On August 05, 2009, Borou obtained a 3-year
term loan from Bank of China Shenzhen Branch (“BOC”) in the amount of RMB
40,000,000 (approximately $5,850.400) bearing interest at approximately 110%
of the prevailing prime rate at the time of the loan (approximately 5.94% per
annum) paid monthly. As of December 31, 2009, RMB 35,000,000
(approximately$5,119,100) was received in August 2009 and the remaining RMB
5,000,000 (approximately $731,100) was received in January 2010. Pursuant to
the loan agreement, the loan can only be used for working capital purpose (RMB
20,000,000) and fixed asset purchase purpose (RMB 20,000,000). If violated, a
penalty will be charged at 100% of interest rate on the violated amount. The
loan is guaranteed by TMK Shenzhen and secured by Mr. Wu Henian, Mr. Huang
Junbiao, and Mr. Wang Zongfu's ownerships in TMK Shenzhen. In addition, the
loan is secured by property owned by Deli Investment Limited Co. with fair
value of RMB 20,000,000 (approximately $2,925,200) and one of Borou’s
properties with fair value of RMB 20,000,000 (approximately $2,925,200). Based
on loan agreement, BOC also has right to request the Company to repay the
outstanding balance immediately if Borou does not meet any of the following:
(a) Borou cannot distribute any bonus or dividend if it incurs an after-tax
loss, or its pretax net income is not significant enough to pay for its prior
year' loss. Any pretax net income should be used to pay off principal and
interests; (b) Borou should pay off the Bank before it pays off borrowing from
its shareholders and other debt; (c) Fixed assets purchase loan can only be
used for equipment purchase. The proceeds will be sent to equipment vendor
directly. Any new equipment purchased under the loan should be added to bank
collateral 30 days after payment is made; (d) Prior to loan payoff date, Borou
should maintain monthly purchase settlements of not less than RMB 8,000,000
(approximately $1,170,080) with the bank (note purchase settlements are
accounted for as the total of each cash-in and cash-out transaction amounts).
Borou did not violate any of the above covenants as at March 31, 2010. In
accordance with the loan agreement, Borou also agreed to pay RMB 1,200,000
(approximately $175,512) of bank charge in 3 years with annual bank charge of
RMB 400,000 made prior to August 30 each year.
On December 30, 2008, TMK Shenzhen obtained
a three-year term loan from China Construction Bank Shenzhen Branch (“CCB”) in
the amount of RMB 30,000,000 (approximately $4,400,698) bearing interest at
approximately 105% of the prevailing prime rate at the time of the loan
(approximately 5.67% per annum and subject to adjustment every 12 months) paid
monthly. Pursuant to the loan agreement, the principal needs to be made at a
fixed amount of RMB 1,000,000 (approximately $146,260) starting from the 13
th
month until maturity date. In the event the Company defaulted on the loan, the
interest rate will be increased to 150% of prime rate. In addition, the loan
should be used for working capital purpose only. If violated, the interest
rate will be increased to 200% of prime rate and the penalty will be computed
at 11.34% of violated amount. The terms of the loan also called for a deposit
of RMB 1,800,000 (approximately $263,268) to Shenzhen General Chamber of
Commerce to secure the loan until the term loan repaid in full. The loan with
CCB is personally guaranteed by Mr. Wang, Zongfu and Mr. Huang, Junbiao and
secured by Ms. Tu, Lanzhen (CEO’s Wife)'s personal property with fair value of
RMB 3,000,000 (approximately $440,070) and the Company's equipment with fair
value of RMB 20,030,700 (approximately $2,938,302). The Company did not
violate any of the above covenants as of March 31, 2010.
12
The terms of the long-term bank loans
require the Company to maintain a deposit at the bank to secure the loans as
follows:
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
DBS Bank
|
$
|
438,840
|
|
$
|
438,780
|
|
|
Total Current Portion
|
$
|
438,840
|
|
$
|
438,780
|
|
|
|
|
|
|
|
|
|
|
China Construction Bank
|
$
|
263,304
|
|
$
|
263,268
|
|
|
Total Non-current Portion
|
$
|
263,304
|
|
$
|
263,268
|
|
NOTE 8: RELATED PARTY TRANSACTIONS
The related parties consist of the
following:
|
Wu, Henian
|
Chairman
|
|
Wang, Zongfu
|
Vice President and Director
|
|
Huang, Junbiao
|
R&D Director and Director
|
|
Liu, Xiangjun
|
Chief Executive Officer
|
|
Tu, Lanzhen
|
Wu, Henian's wife
|
|
Tu, Jun
|
Borou's chairman
|
|
Q-Lite Industrial Co., Ltd.
|
Yu, Zhengfei (Wang Zongfu's wife) holds 25% of ownership
|
|
Li, Guifang
|
Owner of Unitech
|
Due from related parties
Due from related parties consists of the
following:
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
Liu, Xiangjun
|
$
|
15,213
|
|
$
|
15,204
|
|
The above amounts are advances to various
individuals for regularly business expensed to be paid by the individual on
behalf of the Company. These amounts are non-secured, non-interest bearing,
and are considered to be short-term. As of the date of this filing, in
anticipation of being a U.S. public company, the due from balance has been
repaid and no loans to Liu, Xiangjun are outstanding.
13
Due to related party
Due to related party consists of the
following:
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Wu, Henian
|
|
474,141
|
|
|
-
|
|
|
Wang, Zongfu
|
|
363,676
|
|
|
-
|
|
|
Huang, Junbiao
|
|
180,570
|
|
|
-
|
|
|
Li, Guifang
|
|
385
|
|
|
-
|
|
|
Q-Lite Industrial Co., Ltd
|
|
101,839
|
|
|
17,691
|
|
|
|
$
|
1,120,611
|
|
$
|
17,691
|
|
Ms. Yu, Zhengfei, Mr. Wang, Zongfu’s wife,
holds 25% ownership of Q-Lite Industrial Co., Ltd. (“Q-Lite”). During the
three months ended March 31, 2010 and for the year ended December 31, 2009,
the Company sold products to Q-Lite in the amounts of $40,707 and $346,047
respectively.
NOTE 9: INCOME TAX
Leading Asia is registered in BVI and under
the current laws of the BVI, is not subject to income taxes.
Good Wealth is a holding company registered
in Hong Kong and has no operating profit for tax liabilities.
TMK Shenzhen is registered in PRC and has
tax advantages granted by local government for corporate income taxes and
sales taxes commencing 2005.
Borou is registered in PBC and is subject to
regular corporate income tax rate. The assessment of its tax liabilities is
combined with that of TMK Shenzhen.
The effective tax rate for the Company for
the three months ended March 31, 2010 and 2009 was 32% and 15%, respectively.
Various Taxes
The Company is subject to pay various taxes
such as Value Added Tax (VAT), City Development Tax, and Education tax to the
local government tax authorities. The VAT collected on sales is netted against
the taxes paid for purchases of cost of goods sold to determine the amounts
payable and refundable. The City Development Tax and Education Tax are
expensed as general and administrative expense.
NOTE 10 - PRIVATE PLACEMENT
On February 10, 2010, concurrently with the
close of the Share Exchange, the Company conducted a private placement
transaction (the “Private Placement”) pursuant to which the Company sold an
aggregate of 5,486,000 shares of common stock at $1.25 per share (the shares
were sold in 54.86 units, each of which included 100,000 shares of common
stock and 50,000 detachable common stock warrants with a five year maturity).
As a result, the Company received gross proceeds in the amount of
approximately $6.9 million. Hudson Securities, Inc. (“Hudson”) and its
designees were paid a placement agent commission equal to 6.5% of the gross
proceeds from the financing and the Company incurred an additional $108,810 in
other fees and costs. In addition, the Company issued to Hudson and its
designees 560,000 shares of common stock as partial consideration for advisory
services provided in connection with the RTO transaction and a five-year
warrant for the purchase of an amount of shares equal to 8% of the number of
securities issued in the private placement, exercisable at an initial exercise
price of $1.25 per share as partial consideration for placement agent services
provided. In connection with the private placement, the Company also issued to
Hayden Communications International, Inc. (“Hayden”), an investor relations
consulting firm, 125,000 shares of Common Stock as partial consideration for
the consulting services provided by Hayden.
In addition, the Company evaluated the warrants
under ASC 815 to determine whether there is embedded feature included in the
warrant agreements that should be recorded as derivative liability, see Note
13 for further discussion.
14
NOTE 11- COMMON STOCK WARRANTS
In connection with the private placement,
the Company had 2,743,000 shares of common stock issuable upon the exercise of
five-year warrants issued to the investors in the private placement. In
addition, the Company granted Hudson and SHP Securities LLC a five-year
warrant for the purchase of an amount of shares equal to 8% of the number of
securities issued in the private placement. The warrants have an exercise
price of $1.25 per share, are currently exercisable and expire on February 9,
2015. The Company agreed to register the 3,401,320 shares of common stock
underlying the warrants in a Registration Statement. The Registration
Statement was filed on May 24, 2010.
A summary of the Company’s warrant
activities for the three months ended March 31, 2010 is as follows:
|
|
|
|
|
|
Weighted average
|
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Balance December 31, 2009
|
|
-
|
|
$
|
N/A
|
|
|
Private placement
investors
|
|
2,743,000
|
|
$
|
1.60
|
|
|
Hudson Securities,
Inc.
|
|
553,020
|
|
$
|
1.25
|
|
|
SHP Securities LLC
|
|
105,300
|
|
|
1.25
|
|
|
Balance March 31, 2010
|
|
3,401,320
|
|
$
|
1.53
|
|
NOTE 12 - COMMON STOCK SUBSCRIPTION
The Company entered into common share
subscription agreements with multiple employees to raise around $3.4 million
capital in exchange for 2.7 million shares of common stock (at par value
$0.001) . By March 31, 2010, approximately $2.0 million had been collected.
These shares are not registered as of March 24, 2010.
NOTE 13 – DERIVATIVE LIABILITIES
In June 2008, the FASB finalized ASC 815-15,
"Determining Whether an Instrument (or Embedded Feature) is indexed to an
Entity's Own Stock". The EITF lays out a procedure to determine if an
equity-linked financial instrument (or embedded feature) is indexed to its own
common stock. The EITF is effective for fiscal years beginning after December
15, 2008. Pursuant to the Subsequent Equity Sales section under warrant
agreement the Company granted, if and whenever on or after the date of
inception and through the earlier to occur of (i) eighteen months from the
date hereof and (ii) date that there is an effective registration statement on
file with the Securities and Exchange Commission covering the resale of all of
the Warrant Stock and all of the shares of common stock issued in the
offering, the Company issues or sells any shares of common stock or securities
convertible into common stock for a consideration per share of common stock
less than the then current Exercise Price, then, the Exercise Price shall be
multiplied by a fraction. Because of the reset provision, the warrant
agreement is considered not indexed to the Company’s stock and therefore the
3,401,320 warrants were determined to be derivative liability under ASC 815-15
and ASC 815-20. The fair value of these warrants at the inception of the
private placement was $1,218,744.
At March 31, 2010, the derivative liability was
valued at $2,943,977 using the Multinomial Lattice models. The $1,725,233
change in fair value is reported in the Company’s consolidated statement of
operations as a loss on derivatives.
The fair value hierarchy for the Company’s
derivative liability accounted for at fair value was:
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability - embedded feature of equity
|
$
|
-
|
2,943,977
|
-
|
2,943,977
|
|
$
|
-
|
-
|
-
|
-
|
|
|
|
Total
liabilities
|
$
|
-
|
2,943,977
|
-
|
2,943,977
|
|
$
|
-
|
-
|
-
|
-
|
NOTE 14: REVENUE INFORMATION AND
GEOGRAPHIC INFORMATION
The Company believes that it operates in one
business segment (research, development, production, marketing and sales of
electronic products) and in one geographical segment (China), as all of the
Company’s current operations are carried out in China.
15
The geographic information for revenue is as
follows:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
United States
|
$
|
69,178
|
|
$
|
57,900
|
|
|
Ukraine
|
|
32,439
|
|
|
-
|
|
|
Sweden
|
|
67,517
|
|
|
-
|
|
|
Korea
|
|
5,257
|
|
|
-
|
|
|
Japan
|
|
1,712
|
|
|
913
|
|
|
Germany
|
|
-
|
|
|
143,021
|
|
|
Australia
|
|
7,489
|
|
|
13,171
|
|
|
Taiwan
|
|
31,654
|
|
|
34,605
|
|
|
Hong Kong
|
|
238,157
|
|
|
88,405
|
|
|
China
|
|
12,811,069
|
|
|
9,562,641
|
|
|
Total
|
$
|
13,264,472
|
|
$
|
9,900,656
|
|
NOTE 15 - RECONCILIATION OF EARNINGS PER
SHARE
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net income
|
$
|
(1,467,367)
|
|
$
|
1,331,646
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding for basic earnings per share
|
|
30,206,111
|
|
|
25,250,000
|
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
Common stock warrants
|
|
1,104,203
|
|
|
-
|
|
|
Weighted-average
shares outstanding for diluted earnings per share
|
|
31,310,314
|
|
|
25,250,000
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.05)
|
|
$
|
0.05
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
Diluted
|
$
|
(0.05)
|
|
$
|
0.05
|
|
NOTE 16: SUBSEQUENT EVENT
The Company planned to expand production
capacity and signed an agreement with Shenzhen Xutang Economics and Business
Ltd. (“Xutang”) at the end of March, 2010 to lease the A3 plant building (a
four-storey building), A5 plant building (a four-storey building), C1 dorm (a
six-storey building), and office building (a three-storey) located in
Zhongcheng Industry Park, Shenzhen. The lease term is for five years from
April 1, 2010 to March 31, 2015; the leased premises are currently under
remodeling and are expected to be completed in the third quarter of 2010.
16
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Special Note Regarding Forward Looking
Statements
This report contains forward-looking
statements. The forward-looking statements are contained principally in the
sections entitled “Description of Business,” “Risk Factors,” and “Management's
Discussion and Analysis of Financial Condition and Results of Operations.”
These statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements. These risks and
uncertainties include, but are not limited to, the factors described in the
section captioned “Risk Factors” of our Current Report on Form 8-K filed on
February 12, 2010. In some cases, you can identify forward-looking statements
by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,”
“intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,”
“would” and similar expressions intended to identify forward-looking
statements. Forward-looking statements reflect our current views with respect
to future events and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance
on these forward-looking statements.
Also, forward-looking statements represent
our estimates and assumptions only as of the date of this report. You should
read this report and the documents that we reference and filed as exhibits to
this report completely and with the understanding that our actual future
results may be materially different from what we expect. Except as required by
law, we assume no obligation to update any forward-looking statements
publicly, or to update the reasons actual results could differ materially from
those anticipated in any forward-looking statements, even if new information
becomes available in the future.
Use of Terms
Except where the context otherwise requires
and for the purposes of this report only:
-
the “Company,” “we,” “us,” and “our” refer to
the combined business of China TMK Battery Systems Inc., a Nevada
corporation (formerly, Deerfield Resources, Ltd.), and its wholly owned
subsidiaries, Leading Asia Pacific Investment Limited, or “Leading Asia,” a
BVI company, Good Wealth Capital Investment Limited, or “Good Wealth,” a
Hong Kong company, and Shenzhen TMK Power Industries Ltd., or “TMK,” a PRC
limited company, as the case may be;
-
“BVI” refers to the British Virgin Islands;
-
“Exchange Act” refers the Securities Exchange
Act of 1934, as amended;
-
“Hong Kong” refers to the Hong Kong Special
Administrative Region of the People's Republic of China;
-
“PRC,” “China,” and “Chinese,” refer to the
People's Republic of China;
-
“Renminbi” and “RMB” refer to the legal
currency of China;
-
“SEC” refers to the Securities and Exchange
Commission;
-
“Securities Act” refers to the Securities Act
of 1933, as amended; and
-
“U.S. dollars,” “dollars” and “$” refer to
the legal currency of the United States. Throughout this report, we have
converted RMB to USD as follows:
|
|
|
|
March 31, 2010
|
|
|
Balance sheet
|
RMB 6.83620 to US$1.00
|
|
Statement of income
and comprehensive income
|
RMB 6.81896 to US$1.00
|
|
|
|
|
March 31, 2009
|
|
|
Balance sheet
|
RMB 6.84556 to US$1.00
|
|
Statement of income
and comprehensive income
|
RMB 6.82547 to US$1.00
|
17
Overview
We were incorporated under the laws of the
State of Nevada on June 21, 2006. We were originally formed as an exploration
stage company to engage in the search for mineral deposits or reserves. From
inception through September 2007, we conducted preliminary exploration
activities on certain properties in White Bay, Newfoundland, Canada, on which
we held six gold mining claims, pursuant to the Claim Purchase Agreement. Our
activities included the conduct of preliminary geological mapping and
trenching on the properties, which determined that there were no economic
quantities of minerals or reserves whatsoever on any of the properties. From
September 2008 through to the date of our reverse acquisition, discussed
below, we were a shell company with no operations and our sole purpose was to
locate and consummate a merger or acquisition with a private entity. As a
result of the reverse acquisition transaction, discussed below, we terminated
the Claim Purchase Agreement and are now engaged in the design, development,
manufacture and sale of environmentally-friendly nickel-metal hydride cell, or
Ni-MH, rechargeable batteries in China, through our wholly owned PRC
subsidiary, TMK.
We produce and sell high-rate SC, C, D, and
F Ni-MH batteries primarily to manufacturers that produce mechanical devices,
such as Siemens, LG, Electrolux, Bosch, Venom, and Changhong. Our products are
commonly used to power vacuum cleaners and other household electrical
appliances; cordless power tools; medical devices; light electric vehicles,
such as bicycles, electric vehicles and hybrid electric vehicles; light
fittings, battery-operated toys, telecommunications, traffic control, and
traffic lighting applications; and personal portable electronic devices, such
as digital cameras, portable media players, portable gaming devices and PDAs.
We are actively seeking opportunities to expand into the Lithium-Ion battery
space through leveraging our lithium battery patent and those of our customers
who purchase both nickel-metal hydride and Lithium-Ion batteries, and
opportunities to design and distribute batteries for use in
telecommunications, traffic control, and traffic lighting applications. We
have developed and sent working prototypes of both nickel-metal hydride
battery and Lithium-Ion battery to some of our customers for testing and
expect to roll out new products before the end of 2010. More recently, we have
developed a working prototype of a hybrid electric vehicle battery pack and
are producing sample cells for testing for an electric vehicle battery pack.
To expand our business into the hybrid electric vehicle and electric vehicle
markets, we plan to establish an advanced power battery research and
development center, set up a battery-production base for small scale testing
and production and establish a cooperation application demonstration point
with 1-3 vehicle producers to lay a solid foundation for the approval of the
project and for the support of the government. To date, we have entered into
letters of intent with two automobile companies in China for the sale of our
hybrid electric vehicle battery packs.
We conduct all of our operations in Shenzhen
City, China, in close proximity to China's electronics manufacturing base and
its rapidly growing market. Our access to China's supply of low-cost skilled
labor, raw materials, machinery and facilities enables us to price our
products competitively in an increasingly price-sensitive market. In addition,
we have automated key stages of our manufacturing process to be able to
produce high-quality battery cells that consistently meet the stringent
requirements of our customers.
Recent Developments
On February 10, 2010, we entered into and
closed a share exchange agreement with Leading Asia, a BVI company, and its
sole shareholder, Unitech, a BVI company, pursuant to which we acquired 100%
of the issued and outstanding capital stock of Leading Asia in exchange for
25,250,000 shares of our common stock, par value $0.001, which constituted
90.18% of our issued and outstanding capital stock on a fully-diluted basis as
of and immediately after the consummation of the transactions contemplated by
the share exchange agreement. The share exchange transaction with Leading Asia
was treated as a reverse acquisition, with Leading Asia as the acquirer and
China TMK Battery Systems Inc. as the acquired party. Unless the context
suggests otherwise, when we refer in this report to business and financial
information for periods prior to the consummation of the reverse acquisition,
we are referring to the business and financial information of Leading Asia and
its consolidated subsidiaries. Immediately following closing of the reverse
acquisition of Leading Asia, Unitech transferred 10,524,600 of the 25,250,000
shares issued to it under the share exchange to 22 individuals and entities,
pursuant to a share allocation agreement that Unitech entered into with these
people on February 10, 2010.
On February 10, 2010, we also completed a
private placement transaction with a group of accredited investors, pursuant
to which we issued to the investors an aggregate of 5,486,000 shares of our
common stock, for a purchase price $1.25 per share, and warrants to purchase
up to 2,743,000 shares of our common stock. The warrants have a term of 5
years, bear an exercise price of $1.60 per share, as adjusted from time to
time pursuant to anti-dilution and other customary provisions, and are
exercisable by investors at any time after the closing date. As a result of
this private placement we raised $6,857,500 in gross proceeds, which left us
with $5,392,151 in net proceeds after the deduction of offering expenses in
the amount of $1,465,349.
For details regarding the share exchange
agreement and the private placement transaction see our Current Report on Form
8-K filed on February 12, 2010.
18
On February 10, 2010, we changed our name to
“China TMK Battery Systems Inc.” to more accurately reflect our new business
operations. Our common stock will be quoted on the Over-the-Counter Bulletin
Board maintained by the Financial Industry Regulatory Authority, or FINRA,
under the symbol “DFEL” until FINRA assigns a new symbol to our common stock
in connection with our name change.
The chart below presents our
corporate structure:
Our principal executive offices are located
at Sanjun Industrial Park, No. 2 Huawang Rd., Dalang Street, Bao'an District,
Shenzhen, 518109, People's Republic of China. The telephone number at our
principal executive office is (+86) 755 28109908.
Results of Operations
The following table sets forth key
components of our results of operations during the three month periods ended
March 31, 2010 and 2009, respectively, both in dollars and as a percentage of
our net sales. As the acquisition of Leading Asia, Good Wealth and TMK was
entered into on February 10, 2010 and acquisition of Borou on July 14, 2009
and during the periods indicated such entities were the only entities in our
combined business that had operations, the results of operations below refer
only to that of Leading Asia, Good Wealth, Borou and TMK.
|
|
|
For Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(as
|
|
|
|
|
|
(as
|
|
|
|
|
(in
|
|
|
percent of
|
|
|
(in
|
|
|
percent of
|
|
|
|
|
thousands)
|
|
|
revenue)
|
|
|
thousands)
|
|
|
revenue)
|
|
|
|
|
(all amounts are in thousands except
percentages,
share and per
share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
13,264
|
|
|
100.0%
|
|
$
|
9,901
|
|
|
100.0%
|
|
|
Cost of Goods
Sold
|
|
(10,105
|
)
|
|
-76.2%
|
|
|
(7,489
|
)
|
|
-75.6%
|
|
|
Gross Profit
|
|
3,159
|
|
|
23.8%
|
|
|
2,412
|
|
|
24.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Expenses
|
|
235
|
|
|
1.8%
|
|
|
191
|
|
|
1.9%
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
18
|
|
|
0.1%
|
|
|
53
|
|
|
0.5%
|
|
|
General and
administrative
|
|
1,823
|
|
|
13.7%
|
|
|
269
|
|
|
2.7%
|
|
|
Research and
development
|
|
165
|
|
|
1.2%
|
|
|
112
|
|
|
1.1%
|
|
|
Total operating
expenses
|
|
2,241
|
|
|
16.9%
|
|
|
625
|
|
|
6.3%
|
|
|
Income (loss) from
operations
|
|
918
|
|
|
6.9%
|
|
|
1,787
|
|
|
18.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(242
|
)
|
|
-1.8%
|
|
|
(219
|
)
|
|
-2.2%
|
|
|
Other expenses,
net
|
|
(60
|
)
|
|
-0.5%
|
|
|
(1
|
)
|
|
0.0%
|
|
|
Change in fair
value of embedded derivative
|
|
(1,725
|
)
|
|
-13.0%
|
|
|
0
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
expenses
|
|
(2,027
|
)
|
|
-15.3%
|
|
|
(220
|
)
|
|
-2.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes
|
|
(1,109
|
)
|
|
-8.4%
|
|
|
1,567
|
|
|
15.8%
|
|
|
Income taxes
|
|
(358
|
)
|
|
-2.7%
|
|
|
(235
|
)
|
|
-2.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
$
|
(1,467
|
)
|
|
-11.1%
|
|
|
1,332
|
|
|
13.5%
|
|
Sales Revenue
.
Our sales revenue increased to $13.3 million in the three months ended March
31, 2010 from $9.9 million in the same period in 2009, representing a 34.0%
increase period-over-period. . The increase in revenue was attributed mainly
to the increased demand for our products, which we believe is a result of our
market expansion efforts.
Cost of Sales
.
Our cost of sales increased $2.6million, or 34.9%, to $10.1 million in the
three months ended March 31, 2010 from $7.5 million in the same period in
2009. The increase was primarily a result of the increase in sales and was
relatively consistent with the increase in our net revenue.
Gross Profit and Gross Margin
.
Our gross profit increased $0.8 million, or 31.0%, to $3.2 million in the
three months ended March 31, 2010 from $2.4million in the same period in 2009.
The increase was primarily a result of the increase in sales and was
relatively consistent with the increase in our net revenue. Our gross margin
is 23.8% in first quarter of 2010 compared to 24.4% in the same period last
year. The decrease in gross margin is mainly due to increase in the production
cost.
Operating Expense
Operating expense was $2.2 million in the three
months ended March 31, 2010 compare to $0.6 million in the same period last
year. It is mainly due to one-time merger cost of $1.77 million in the first
quarter of 2010.
Change in Fair Value of Embedded Derivative
We granted a total of 3,401,320
warrants in connection with our private placement in February 2010. Due to the
reset provision included in our warrant agreements, warrants are classified as
derivative liability. The loss from change in fair value of derivative
liability represents the difference of fair value between February 10, 2010
(inception) and March 31, 2010.
Income (Loss) Before Income Taxes
.
Our income before income taxes decreased by $2.68 million, or 170.8%, to -$1.1
million in the three months ended March 31, 2010 from $1.6 million in the same
period in 2009. The decrease in income before income tax is primarily due to
increase in the one-time merger cost and loss of $1.73 million from change in
fair value of derivative liability.
Income Taxes
. We incurred $.4 million income tax expenses in the three months ended
March 31, 2010, as compared to $.2 million in the same period in 2009. The
income taxes increased in the three months ended March 31, 2010 vs. same
period in 2009 even though income before income taxes decreased in the three
months ended March 31, 2010 vs. same period in 2009. The reason was that
merger cost of $1.77 million and loss of $1.73 million from change in fair
value of derivative liability were incurred on US shell company level which
was not subject to any income taxes.
Net Income (Loss)
.
In the three months ended March 31, 2010, we incurred a net loss of $1.5
million, a decrease of $2.8 million, or 210.2%, from $1.3 million in the same
period in 2009.
Liquidity and Capital Resources
As of March 31, 2010, we had cash and cash
equivalents of $.29 million, primarily consisting of cash on hand and demand
deposits. The following table provides detailed information about our net cash
flow for all financial statement periods presented in this report. To date, we
have financed our operations primarily through cash flows from operations,
augmented by short-term bank borrowings and equity contributions by our
stockholders.
20
The following table sets forth a summary of
our cash flows for the periods indicated:
Cash Flow
(all amounts in U.S. dollars)
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
Net cash provided by
(used in) operating activities
|
$
|
(1,147,250
|
)
|
$
|
2,665,341
|
|
|
Net cash used in investing activities
|
|
(5,874,237
|
)
|
|
(4,950,639
|
)
|
|
Net cash provided by
(used in) financing activities
|
|
6,970,904
|
|
|
3,665,205
|
|
|
Effects of exchange
rate change in cash
|
|
154,354
|
|
|
(276,092
|
)
|
|
Net increase
in cash and cash equivalents
|
|
103,771
|
|
|
1,103,815
|
|
|
Cash and cash
equivalent at beginning of the quarter
|
|
185,590
|
|
|
186,463
|
|
|
Cash and cash
equivalent at end of the quarter
|
$
|
289,361
|
|
$
|
1,290,278
|
|
Operating activities
Net cash used in operating activities was
$1.1 million for the three months ended March 31, 2010, as compared to $2.7
million net cash provided by operating activities for the same period in 2009.
The decrease in net cash provided in operating activities was primarily due to
decrease in net income and increase in AR and prepaid expense. The decrease is
partially offset by the increase in inventories and change in fair value of
embedded derivative.
Investing activities
Net cash used in investing activities for
the three months ended March 31, 2010 was $5.9 million, as compared to $5.0
million net cash used in investing activities for the same period of 2009. The
increase of net cash used in investing activities was mainly attributable to
PPE purchase and deposit for Hualian acquisition.
Financing activities
Net cash provided by financing activities
for the three months ended March 31, 2010 was $7.0 million, as compared to
$3.7 million net cash provided by financing activities for the same period of
2009. The increase of net cash provided by financing activities was mainly
attributable to completion of the private placement in the first quarter of
2010.
We believe that our cash on hand and cash
flow from operations will meet part of our present cash needs and we will
require additional cash resources, including loans, to meet our expected
capital expenditure and working capital for the next 12 months. We may,
however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or
obtain additional credit facilities. The sale of additional equity securities
could result in dilution to our stockholders. The incurrence of indebtedness
would result in increased debt service obligations and could require us to
agree to operating and financial covenants that would restrict our operations.
Financing may not be available in amounts or on terms acceptable to us, if at
all. Any failure by us to raise additional funds on terms favorable to us, or
at all, could limit our ability to expand our business operations and could
harm our overall business prospects.
Inflation
Inflation and changing prices have not had a
material effect on our business and we do not expect that inflation or
changing prices will materially affect our business in the foreseeable future.
However, our management will closely monitor the price change in travel
industry and continually maintain effective cost control in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity or capital expenditures or capital
resources that is material to an investor in our securities.
21
Seasonality
Our operating results and operating cash
flows historically have not been subject to seasonal variations. This pattern
may change, however, as a result of new market opportunities or new product
introduction.
Critical Accounting Policies
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires our management to make assumptions, estimates and judgments that
affect the amounts reported, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We have identified
certain accounting policies that are significant to the preparation of our
financial statements. These accounting policies are important for an
understanding of our financial condition and results of operation. Critical
accounting policies are those that are most important to the portrayal of our
financial conditions and results of operations and require management's
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods. Certain accounting estimates are
particularly sensitive because of their significance to financial statements
and because of the possibility that future events affecting the estimate may
differ significantly from management's current judgments. We believe the
following critical accounting policies involve the most significant estimates
and judgments used in the preparation of our financial statements:
Revenue recognition
The Company generates revenues from the
sales of environment-friendly batteries including nickel metal hydride
batteries. Sales are recognized when the following four revenue criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the
selling price is fixed or determinable, and collectability is reasonably
assured. Sales are presented net of VAT. No return allowance is made as
products returns are insignificant based on historical experience.
Use of estimates
The preparation of financial statements in
conformity with generally accepted accounting principles, or GAAP, in the
United States of American. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting year. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.
Accounts receivable
Accounts receivables are recognized and
carried at original invoiced amount less an allowance for uncollectible
accounts, as needed. The Company uses the aging method to estimate the
valuation allowance for anticipated uncollectible receivable balances. Under
the aging method, bad debts percentages determined by management based on
historical experience as well as current economic climate are applied to
customers' balances categorized by the number of months the underlying
invoices have remained outstanding. The valuation allowance balance is
adjusted to the amount computed as a result of the aging method. When facts
subsequently become available to indicate that the amount provided as the
allowance was incorrect, an adjustment which classified as a change in
estimate is made.
Impairment of long-lived assets
The Company accounts for impairment of plant
and equipment and amortizable intangible assets in accordance with ASC 360,
“Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of”, which requires the Company to evaluate a long-lived asset for
recoverability when there is event or circumstance that indicate the carrying
value of the asset may not be recoverable. An impairment loss is recognized
when the carrying amount of a long-lived asset or asset group is not
recoverable (when carrying amount exceeds the gross, undiscounted cash flows
from use and disposition) and is measured as the excess of the carrying amount
over the asset's (or asset group's) fair value.
22
Comprehensive income
The Company reports comprehensive income,
its components, and accumulated balances in its financial statements.
Accumulated other comprehensive income represents the accumulated balance of
foreign currency translation adjustments. No other items of comprehensive
income are present.
Foreign currency
The functional currency of the Company is
RMB. The Company maintains its financial statements using the functional
currency. Monetary assets and liabilities denominated in currencies other than
the functional currency are translated into the functional currency at rates
of exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the
functional currency at the exchange rates prevailing at the dates of the
transaction. Exchange gains or losses arising from foreign currency
transactions are included in the determination of net income (loss) for the
respective periods.
For financial reporting purposes, the
financial statements of the Company, which are prepared in RMB, are translated
into the Company's reporting currency, USD. Balance sheet accounts are
translated using the closing exchange rate in effect at the balance sheet date
and income and expense accounts are translated using the average exchange rate
prevailing during the reporting period. Adjustments resulting from the
translation, if any, are included in accumulated other comprehensive income
(loss) in stockholder's equity.
Government grants
Grants from the PRC government are
recognized at their fair value where there is a reasonable assurance that the
grant will be received and the Company will comply with all attached
conditions. Government grants are recognized as revenues or gains in the
periods received and as assets, decreases of liabilities, or expenses
depending on the form of the grants received.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting
Standards Board, or FASB, issued a standard that established the FASB
Accounting Standards Codification, or ASC, amended the hierarchy of generally
accepted accounting principles such that the ASC became the single source of
authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S.
GAAP, but was intended to simplify user access to all authoritative U.S. GAAP
by providing all the authoritative literature related to a particular topic in
one place. All previously existing accounting standard documents were
superseded and all other accounting literature not included in the ASC is
considered non-authoritative. New accounting standards issued subsequent to
June 30, 2009 are communicated by the FASB through Accounting Standards
Updates, or ASUs. The Company adopted the ASC on July 1, 2009. This standard
did not have an impact on the Company's consolidated results of operations or
financial condition. However, throughout the notes to the consolidated
financial statements references that were previously made to various former
authoritative U.S. GAAP pronouncements have been changed to coincide with the
appropriate section of the ASC.
In September 2009, the FASB issued an
accounting standard codified in ASC 820,
Fair Value Measurements and
Disclosures
. This standard established a single definition of fair value
and a framework for measuring fair value, set out a fair value hierarchy to be
used to classify the source of information used in fair value measurements,
and required disclosures of assets and liabilities measured at fair value
based on their level in the hierarchy. This standard applies under other
accounting standards that require or permit fair value measurements. One of
the amendments deferred the effective date for one year relative to
nonfinancial assets and liabilities that are measured at fair value, but are
recognized or disclosed at fair value on a nonrecurring basis. This deferral
applied to such items as nonfinancial assets and liabilities initially
measured at fair value in a business combination (but not measured at fair
value in subsequent periods) or nonfinancial long-lived asset groups measured
at fair value for an impairment assessment. The adoption of the fair value
measurement standard did not have a material impact on the Company's
consolidated results of operations or financial condition.
In December 2007, the FASB issued and, in
April 2009, amended a new business combinations standard codified within ASC
805, which changed the accounting for business acquisitions. Accounting for
business combinations under this standard requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction and establishes the acquisition-date
fair value as the measurement objective for all assets acquired and
liabilities assumed in a business combination. Certain provisions of this
standard impact the determination of acquisition-date fair value of
consideration paid in a business combination (including contingent
consideration); exclude transaction costs from acquisition accounting; and
change accounting practices for acquisition-related restructuring costs,
in-process research and development, indemnification assets, and tax benefits.
The Company adopted the standard for business combinations for its business
combination during the period ended June 30, 2009.
23
In April 2009, the FASB issued an accounting
standard which provides guidance on (1) estimating the fair value of an asset
or liability when the volume and level of activity for the asset or liability
have significantly declined and (2) identifying transactions that are not
orderly. The standard also amended certain disclosure provisions for fair
value measurements and disclosures in ASC 820 to require, among other things,
disclosures in interim periods of the inputs and valuation techniques used to
measure fair value as well as disclosure of the hierarchy of the source of
underlying fair value information on a disaggregated basis by specific major
category of investment. The standard was effective prospectively beginning
April 1, 2009. The adoption of this standard did not have a material impact on
the Company's consolidated results of operations or financial condition.
In April 2009, the FASB issued an accounting
standard regarding interim disclosures about fair value of financial
instruments. The standard essentially expands the disclosure about fair value
of financial instruments that were previously required only annually to also
be required for interim period reporting. In addition, the standard requires
certain additional disclosures regarding the methods and significant
assumptions used to estimate the fair value of financial instruments. The
adoption of this standard did not have a material impact on the Company's
consolidated results of operations or financial condition.
In May 2009, the FASB issued a new
accounting standard regarding subsequent events. This standard incorporates
into authoritative accounting literature certain guidance that already existed
within generally accepted auditing standards, with the requirements concerning
recognition and disclosure of subsequent events remaining essentially
unchanged. This guidance addresses events which occur after the balance sheet
date but before the issuance of financial statements. Under the new standard,
as under previous practice, an entity must record the effects of subsequent
events that provide evidence about conditions that existed at the balance
sheet date and must disclose but not record the effects of subsequent events
which provide evidence about conditions that did not exist at the balance
sheet date. This standard added an additional required disclosure relative to
the date through which subsequent events have been evaluated and whether that
is the date on which the financial statements were issued. For the Company
,
this standard was effective beginning April 1, 2009.
In June 2009, the FASB issued a new standard
regarding the accounting for transfers of financial assets amending the
existing guidance on transfers of financial assets to, among other things,
eliminate the qualifying special-purpose entity concept, include a new unit of
account definition that must be met for transfers of portions of financial
assets to be eligible for sale accounting, clarify and change the
derecognition criteria for a transfer to be accounted for as a sale, and
require significant additional disclosure. The standard is effective for new
transfers of financial assets beginning January 1, 2010. The adoption of this
standard did not have a material impact on the Company's consolidated results
of operations or financial condition.
In June 2009, the FASB issued an accounting
standard that revised the consolidation guidance for variable-interest
entities. The modifications include the elimination of the exemption for
qualifying special purpose entities, a new approach for determining who should
consolidate a variable-interest entity, and changes to when it is necessary to
reassess who should consolidate a variable-interest entity. The standard is
effective January 1, 2010. The adoption of this standard did not have a
material impact on the Company's consolidated results of operations or
financial condition.
In August 2009, the FASB issued ASU No.
2009-05,
Measuring Liabilities at Fair Value
, which provides additional
guidance on how companies should measure liabilities at fair value under ASC
820. The ASU clarifies that the quoted price for an identical liability should
be used. However, if such information is not available, a entity may use, the
quoted price of an identical liability when traded as an asset, quoted prices
for similar liabilities or similar liabilities traded as assets, or another
valuation technique (such as the market or income approach). The ASU also
indicates that the fair value of a liability is not adjusted to reflect the
impact of contractual restrictions that prevent its transfer and indicates
circumstances in which quoted prices for an identical liability or quoted
price for an identical liability traded as an asset may be considered level 1
fair value. This ASU is effective October 1, 2009. The adoption of this
standard did not have a material impact on the Company's consolidated results
of operations or financial condition.
In October 2009, the FASB issued ASU No.
2009-13,
Multiple-Deliverable Revenue Arrangements—a consensus of the FASB
Emerging Issues Task Force
, that provides amendments to the criteria for
separating consideration in multiple-deliverable arrangements. As a result of
these amendments, multiple-deliverable revenue arrangements will be separated
in more circumstances than under existing U.S. GAAP. The ASU does this by
establishing a selling price hierarchy for determining the selling price of a
deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling
price if neither vendor-specific objective evidence nor third-party evidence
is available. A vendor will be required to determine its best estimate of
selling price in a manner that is consistent with that used to determine the
price to sell the deliverable on a standalone basis. This ASU also eliminates
the residual method of allocation and will require that arrangement
consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method, which allocates any
discount in the overall arrangement proportionally to each deliverable based
on its relative selling price. Expanded disclosures of qualitative and
quantitative information regarding application of the multiple-deliverable
revenue arrangement guidance are also required under the ASU. The ASU does not
apply to arrangements for which industry specific allocation and measurement
guidance exists, such as long-term construction contracts and software
transactions. The ASU is effective beginning January 1, 2011. The Company is
currently evaluating the impact of this standard on the Company's consolidated
results of operations and financial condition.
24
In October 2009, the FASB issued ASU No.
2009-14,
Certain Revenue Arrangements That Include Software Elements—a
consensus of the FASB Emerging Issues Task Force
, that reduces the types
of transactions that fall within the current scope of software revenue
recognition guidance. Existing software revenue recognition guidance requires
that its provisions be applied to an entire arrangement when the sale of any
products or services containing or utilizing software when the software is
considered more than incidental to the product or service. As a result of the
amendments included in ASU No. 2009-14, many tangible products and services
that rely on software will be accounted for under the multiple-element
arrangements revenue recognition guidance rather than under the software
revenue recognition guidance. Under the ASU, the following components would be
excluded from the scope of software revenue recognition guidance: the tangible
element of the product, software products bundled with tangible products where
the software components and non-software components function together to
deliver the product's essential functionality, and undelivered components that
relate to software that is essential to the tangible product's functionality.
The ASU also provides guidance on how to allocate transaction consideration
when an arrangement contains both deliverables within the scope of software
revenue guidance (software deliverables) and deliverables not within the scope
of that guidance (non-software deliverables). The ASU is effective beginning
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company's consolidated results of operations and financial
condition.
In January 2010, the FASB issued ASU No.
2010-6, Improving Disclosures About Fair Value Measurements, that amends
existing disclosure requirements under ASC 820 by adding required disclosures
about items transferring into and out of levels 1 and 2 in the fair value
hierarchy; adding separate disclosures about purchase, sales, issuances, and
settlements relative to level 3 measurements; and clarifying, among other
things, the existing fair value disclosures about the level of disaggregation.
This ASU is effective for the first quarter of 2010, except for the
requirement to provide level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which is effective beginning the first quarter
of 2011. Since this standard impacts disclosure requirements only, its
adoption will not have a material impact on the Company’s consolidated results
of operations or financial condition.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEMS 4 AND 4A(T).
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
SEC and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(e), our
management has carried out an evaluation, with the participation and under the
supervision of our Chief Executive Officer, Ms. Xiangjun Liu and our Chief
Financial Officer, Mr. Jin Hu, of the effectiveness of the design and
operation of our disclosure controls and procedures, as of March 31, 2010.
Based upon, and as of the date of this evaluation, Ms. Liu and Mr. Hu,
determined that, our disclosure controls and procedures were not effective due
to the deficiencies described below.
These deficiencies consisted of inadequate staffing and
supervision that could lead to the untimely identification and resolution of
accounting and disclosure matters and failure to perform timely and effective
reviews. In addition, there are deficiencies in the recording and
classification of accounting transactions and a lack of personnel with
expertise in US generally accepted accounting principles and US Securities and
Exchange Commission rules and regulations.
Deficiencies in our controls and procedures have led to
restatements of our financial statements. In August 2010, we discovered that
our financial statements for the three months ended March 31, 2010 should not
be relied upon due to an error in accounting for warrants issued by the
Company in connection with our private placement. On February 10, 2010, the
Company issued warrants to both investors and private placement agent. The
Warrants terms included rights to purchase shares of stock at various exercise
prices per share and subject to adjustment for share issuances (dilutive
reset). The Warrants contain reset features (subject to adjustment for
dilutive share issuances) and based on the guidance of ASC 815-15 and ASC
815-20, the warrants should be valued as a derivative liability. The Company
failed to record Derivative Liability and related Additional Paid-in Capital
at inception date. In addition, the Company failed to record the change in
fair value of derivative liability between inception date and March 31, 2010
in Form 10-Q filed on May 24, 2010.
We are seeking to improve our controls and procedures in an
effort to remediate these deficiencies through improving supervision,
education, and training of our accounting staff. We will also seek third-party
financial consultant to review and analyze our financial statements and assist
us in improving our reporting of financial information. Management plans to
enlist additional qualified in-house accounting personnel and third-party
accounting personnel to ensure that management will have adequate resources in
order to attain complete reporting of financial information disclosures in a
timely matter.
25
Changes in Internal Controls over
Financial Reporting
We regularly review our system of internal
control over financial reporting and make changes to our processes and systems
to improve controls and increase efficiency, while ensuring that we maintain
an effective internal control environment. Changes may include such activities
as implementing new, more efficient systems, consolidating activities, and
migrating processes.
There were no changes in our internal
controls over financial reporting during the first quarter of fiscal 2010 that
have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
From time to time, we may become involved in
various lawsuits and legal proceedings, which arise, in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an
adverse result in these, or other matters, may arise from time to time that
may harm our business. Other than the legal proceedings set forth below, we
are currently not aware of any such legal proceedings or claims that we
believe will have a material adverse affect on our business, financial
condition or operating results.
ITEM 1A.
RISK FACTORS.
Not applicable.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
We have not sold any equity securities
during the quarter ended March 31, 2010 which sale was not previously
disclosed in a current report on Form 8-K filed during that period.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.
(REMOVED AND RESERVED).
ITEM 5.
OTHER INFORMATION.
We have no information to include that was
required to be but was not disclosed in a report on Form 8-K during the period
covered by this Form 10-Q. There have been no material changes to the
procedures by which security holders may recommend nominees to our board of
directors.
ITEM 6.
EXHIBITS.
The following exhibits are filed as part of
this report or incorporated by reference:
26
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
CHINA TMK BATTERY
SYSTEMS INC.
|
|
|
|
|
|
|
|
Dated: October 20,
2010
|
/s/Henian Wu
|
|
|
Henian Wu
|
|
|
Chairman
|
|
|
(
Principal
Executive Officer
)
|
|
|
|
|
|
|
|
|
|
|
Dated: October 20,
2010
|
/s/ Jin Hu
|
|
|
Jin Hu
|
|
|
Chief Financial
Officer
|
|
|
(Principal
Financial Officer and Principal Accounting Officer)
|
EXHIBIT INDEX