UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10−Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2011
[ ]
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 333-139660
CHINA TMK BATTERY SYSTEMS
INC.
(Exact Name of Registrant as Specified in Its Charter)
|
Nevada
|
98-0506246
|
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
|
incorporation or organization)
|
|
Sanjun Industrial Park
No. 2 Huawang Rd., Dalang Street
Bao'an District, Shenzhen 518109
People’s Republic of China
(Address of principal executive offices, Zip Code)
(+86) 755 28109908
(Registrant’s telephone
number, including area code)
_____________________________________________________
(Former
name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [_] No [_]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large accelerated filer [_]
|
Accelerated filer [_]
|
|
Non-accelerated filer [_] (Do not check if a smaller
reporting company)
|
Smaller reporting company [X]
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The number of shares outstanding of each of the issuer’s
classes of common stock, as of May 12, 2011 is as follows:
|
Class of Securities
|
Shares Outstanding
|
|
Common Stock, $0.001 par value
|
36,888,000
|
|
China TMK Battery Systems Inc.
|
|
Quarterly Report on Form 10-Q
|
|
Three
Months Ended March 31, 2011
|
TABLE OF CONTENTS
|
PART I
|
|
1
|
|
FINANCIAL INFORMATION
|
1
|
|
ITEM 1.
|
FINANCIAL STATEMENTS.
|
1
|
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
|
23
|
|
ITEM 4. CONTROLS AND
PROCEDURES.
|
23
|
|
PART II
|
|
23
|
|
OTHER INFORMATION
|
24
|
|
ITEM 1.
|
LEGAL PROCEEDINGS.
|
24
|
|
ITEM 1A.
|
RISK FACTORS.
|
24
|
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS.
|
24
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR
SECURITIES.
|
24
|
|
ITEM 4.
|
(REMOVED AND RESERVED).
|
24
|
|
ITEM 5.
|
OTHER INFORMATION.
|
24
|
|
ITEM 6.
|
EXHIBITS.
|
24
|
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
|
CHINA TMK BATTERY SYSTEMS INC.
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
|
|
|
Page(s)
|
|
Financial Statements
|
|
|
Consolidated Balance Sheets (Unaudited)
|
2
|
|
Consolidated Statements of Operations and Other
Comprehensive Income (Unaudited)
|
4
|
|
Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
|
5
|
|
Consolidated Statements of Cash Flows
(Unaudited)
|
6
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
8– 16
|
- 1 -
|
China TMK Battery System Inc.
|
|
Consolidated Balance Sheets
|
|
(Stated in US dollars)
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
$
|
658,598
|
|
$
|
356,871
|
|
|
Short-term investment
|
|
-
|
|
|
1,512,400
|
|
|
Trade
receivables, net
|
|
13,861,533
|
|
|
12,351,588
|
|
|
VAT recoverable
|
|
376,285
|
|
|
276,768
|
|
|
Inventories, net
|
|
6,262,645
|
|
|
4,973,989
|
|
|
Due from related parties
|
|
-
|
|
|
2,269
|
|
|
Prepaid
expenses and other receivables
|
|
298,200
|
|
|
45,372
|
|
|
Advances to suppliers
|
|
561,056
|
|
|
528,509
|
|
|
Restricted cash
|
|
365,280
|
|
|
1,270,416
|
|
|
Deposit for business
acquisition
|
|
10,325,084
|
|
|
9,397,891
|
|
|
Total Current Assets
|
|
32,708,681
|
|
|
30,716,073
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and construction in
progress, net
|
|
17,120,157
|
|
|
17,239,438
|
|
|
Advances for property and
equipment purchase
|
|
13,937,119
|
|
|
13,849,212
|
|
|
Other
assets
|
|
46,682
|
|
|
46,516
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
63,812,639
|
|
$
|
61,851,239
|
|
|
LIABILITIES & SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
4,278,295
|
|
$
|
4,437,186
|
|
|
Accrued
liabilities and other payable
|
|
1,181,487
|
|
|
576,164
|
|
|
Customer deposits
|
|
688,864
|
|
|
493,256
|
|
|
Wages
payable
|
|
355,282
|
|
|
398,699
|
|
|
Corporate tax payable
|
|
658,894
|
|
|
210,717
|
|
|
Short-term loan
|
|
1,369,800
|
|
|
2,571,080
|
|
|
Current portion of
long-term bank loans
|
|
7,032,069
|
|
|
5,159,422
|
|
|
Property
purchase payable
|
|
502,511
|
|
|
499,342
|
|
|
Derivative liability
|
|
717,875
|
|
|
1,141,118
|
|
|
Due to
related parties
|
|
15,987
|
|
|
19,695
|
|
|
Registration rights
liability
|
|
411,450
|
|
|
411,450
|
|
|
Total Current Liabilities
|
|
17,212,514
|
|
|
15,918,129
|
|
|
|
|
|
|
|
|
|
|
Long-term
bank loans
|
|
10,306,682
|
|
|
12,710,430
|
|
|
Deferred tax liability
|
|
598,374
|
|
|
598,520
|
|
|
Due to
related parties
|
|
1,474,719
|
|
|
1,465,420
|
|
2
|
TOTAL LIABILITIES
|
$
|
29,592,289
|
|
$
|
30,692,499
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value, 10,000,000 shares authorized, none issued and outstanding at March
31, 2011 and December 31, 2010
|
$
|
-
|
|
$
|
-
|
|
|
Common stock, $0.001 par value, 300,000,000
shares authorized, 36,888,000 shares issued and outstanding at March 31,
2011 and December 31, 2010
|
|
36,888
|
|
|
36,888
|
|
|
Common stock subscribed
|
|
-
|
|
|
253
|
|
|
Additional paid-in capital
|
|
10,518,662
|
|
|
11,024,449
|
|
|
Accumulated other
comprehensive income
|
|
1,388,873
|
|
|
1,207,195
|
|
|
Statutory
reserves
|
|
1,038,988
|
|
|
1,038,988
|
|
|
Retained earnings
(unrestricted)
|
|
21,236,939
|
|
|
17,850,967
|
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
34,220,350
|
|
|
31,158,740
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’
EQUITY
|
$
|
63,812,639
|
|
$
|
61,851,239
|
|
The accompanying notes are an integrated part of these
unaudited consolidated financial statements
- 3-
|
China TMK Battery System Inc.
|
|
Consolidated Statements of Operations and Other
Comprehensive Income
|
|
(Unaudited)
|
|
(Stated in US dollars)
|
|
|
|
For the three months
ended March 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Sales revenue
|
$
|
20,292,808
|
|
$
|
13,264,472
|
|
|
Cost of goods sold
|
|
(15,426,800
|
)
|
|
(10,105,697
|
)
|
|
Gross profit
|
|
4,866,008
|
|
|
3,158,775
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
Selling expenses
|
|
371,988
|
|
|
234,718
|
|
|
Depreciation
|
|
60,719
|
|
|
17,505
|
|
|
Other general and
administrative expenses
|
|
417,714
|
|
|
1,822,979
|
|
|
Research and development
|
|
180,686
|
|
|
165,244
|
|
|
Total operating
costs and expenses
|
|
1,031,107
|
|
|
2,240,446
|
|
|
Income from operations
|
|
3,834,901
|
|
|
918,329
|
|
|
Interest income
|
|
43
|
|
|
-
|
|
|
Interest expense
|
|
(294,964
|
)
|
|
(241,907
|
)
|
|
Change in fair value of
derivative liability
|
|
423,243
|
|
|
(1,725,233
|
)
|
|
Other expense, net
|
|
(4,689
|
)
|
|
(60,381
|
)
|
|
Total other income
(expenses)
|
|
123,633
|
|
|
(2,027,521
|
)
|
|
Income (loss) before income taxes
|
|
3,958,534
|
|
|
(1,109,192
|
)
|
|
Income taxes
|
|
(572,562
|
)
|
|
(358,175
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
3,385,972
|
|
$
|
(1,467,367
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
181,678
|
|
|
32,218
|
|
|
Total Comprehensive income
(loss)
|
$
|
3,567,650
|
|
$
|
(1,435,149
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share -
basic
|
$
|
0.09
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding, basic
|
|
36,888,000
|
|
|
30,206,111
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share -
diluted
|
$
|
0.09
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding, diluted
|
|
36,888,000
|
|
|
31,310,314
|
|
The accompanying notes are an integrated part of these
unaudited consolidated financial statements
4
|
China TMK Battery System Inc.
|
|
Consolidated Statements of Changes in Shareholders’
Equity
|
|
For the Three Months Ended March 31, 2011
|
|
(Unaudited)
|
|
(Stated in US dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Common Stock
Subscribed
|
|
|
Additional
|
|
|
Other
|
|
|
Statutory
|
|
|
Retained
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Reserve
|
|
|
Earnings
|
|
|
Shareholder's
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Fund
|
|
|
(Unrestricted)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
36,888,000
|
|
$
|
36,888
|
|
$
|
253,020
|
|
|
253
|
|
|
11,024,449
|
|
$
|
1,207,195
|
|
$
|
1,038,988
|
|
$
|
17,850,967
|
|
$
|
31,158,740
|
|
|
Foreign currency translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
181,678
|
|
|
-
|
|
|
-
|
|
|
181,678
|
|
|
Cancellation of common stock subscribed
|
|
-
|
|
|
-
|
|
|
(253,020
|
)
|
|
(253
|
)
|
|
(505,787
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(506,040
|
)
|
|
Net income for the three months ended March 31, 2011
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,385,972
|
|
|
3,385,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
36,888,000
|
|
$
|
36,888
|
|
$
|
-
|
|
|
-
|
|
|
10,518,662
|
|
$
|
1,388,873
|
|
$
|
1,038,988
|
|
$
|
21,236,939
|
|
$
|
34,220,350
|
|
The accompanying notes are an integrated part of these
unaudited consolidated financial statements
5
|
China TMK Battery Systems Inc. and Subsidiaries
|
|
Consolidated Statements of Cash Flows
|
|
(Unaudited)
|
|
(In US Dollars)
|
|
|
|
For the Three Months
Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
$
|
3,385,972
|
|
$
|
(1,467,367
|
)
|
|
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
259,831
|
|
|
17,505
|
|
|
Deferred income
|
|
-
|
|
|
(9,238
|
)
|
|
Deferred tax benefit
|
|
(3,935
|
)
|
|
-
|
|
|
Change in fair value of derivative liability
|
|
(423,243
|
)
|
|
1,725,233
|
|
|
Common stocks for service provided
|
|
-
|
|
|
856,250
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(1,427,781
|
)
|
|
(2,645,680
|
)
|
|
Advances to suppliers
|
|
(29,116
|
)
|
|
(130,653
|
)
|
|
Other receivable
|
|
(103,871
|
)
|
|
-
|
|
|
Inventories, net
|
|
(1,253,780
|
)
|
|
295,135
|
|
|
Accounts payable
|
|
(186,565
|
)
|
|
1,509,993
|
|
|
Accrued liabilities and other payable
|
|
600,085
|
|
|
(210,925
|
)
|
|
Customer deposits
|
|
191,971
|
|
|
91,871
|
|
|
Prepaid expenses and other receivables
|
|
(194,055
|
)
|
|
(1,007,486
|
)
|
|
Other assets
|
|
129
|
|
|
(58,519
|
)
|
|
Wages payable
|
|
(45,827
|
)
|
|
(50,855
|
)
|
|
Various taxes payable
|
|
348,162
|
|
|
(62,514
|
)
|
|
Net cash provided by (used in) operating activities
|
|
1,117,977
|
|
|
(1,147,250
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
Change in
restricted cash
|
|
910,800
|
|
|
(96
|
)
|
|
Purchases and advances for
property and equipment
|
|
(31,722
|
)
|
|
(2,701,485
|
)
|
|
Deposit for
business acquisition
|
|
(865,260
|
)
|
|
(3,172,656
|
)
|
|
Collection of advances/loans -
related parties
|
|
2,277
|
|
|
-
|
|
|
Proceeds from
maturity of certificate of deposit
|
|
1,512,832
|
|
|
-
|
|
|
Net cash provided by (used in) investing activities
|
|
1,528,927
|
|
|
(5,874,237
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
Borrowing from
bank loans
|
|
1,214,400
|
|
|
1,973,161
|
|
|
Repayments of bank loans
|
|
(3,071,638
|
)
|
|
(2,887,878
|
)
|
|
Net proceeds
from share issuance
|
|
(506,040
|
)
|
|
6,302,953
|
|
|
Proceeds from common stock
subscription
|
|
-
|
|
|
1,989,748
|
|
|
Distribution to
former owners
|
|
-
|
|
|
(1,510,000
|
)
|
|
Proceeds from related parties
|
|
37,562
|
|
|
1,120,611
|
|
|
Repayment to
related parties
|
|
(41,288
|
)
|
|
(17,691
|
)
|
|
Net cash provided by(used in) financing activities
|
|
(2,367,004
|
)
|
|
6,970,904
|
|
6
|
Effect of exchange rate changes on cash
|
|
21,827
|
|
|
154,354
|
|
|
Net increase in cash and cash equivalents
|
|
301,727
|
|
|
103,771
|
|
|
Cash and cash equivalents, beginning of
period
|
|
356,871
|
|
|
185,590
|
|
|
Cash and cash equivalents, end of period
|
$
|
658,598
|
|
$
|
289,361
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure information:
|
|
|
|
|
|
|
|
Income taxes
paid
|
$
|
109,810
|
|
$
|
339,411
|
|
|
Interest paid
|
$
|
294,964
|
|
$
|
241,907
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
- 7-
|
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, the Company entered into and
closed the Share Exchange Agreement with Leading Asia Pacific Investment Limited
(“Leading Asia”), a BVI company, and its sole stockholder, Unitech, a BVI
company, pursuant to which the Company 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 reverse 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.
Leading Asia Pacific Investment Limited (“Leading Asia”) was
incorporated in British Virgin Islands on July 08, 2008. Leading Asia had 50,000
capital shares authorized with $1.00 par value and 50,000 shares issued and
outstanding.
Good Wealth Capital Investment Limited (“Good Wealth”) was
incorporated in Hong Kong on May 16, 2008. The Company had 10,000 capital shares
authorized with 1.00 HK dollar par value and 10,000 shares issued and
outstanding. On August 12, 2008, Leading Asia acquired Good Wealth and became
the sole shareholder.
In September 2008, Good Wealth entered into an ownership
transfer agreement with TMK Power Industries (SZ) Co., Ltd. and its
shareholders. Pursuant to the agreement, TMK's shareholders agreed to transfer
their 100% ownership interest to Good Wealth at a price of $1,510,000. The
ownership transfer was approved and completed by the appropriate China
government department in February 2010. TMK Power Industries (SZ) Co., Ltd.
(“TMK Shenzhen”) was incorporated in Shenzhen, People's Republic of China
(“PRC”) on September 3, 2001. The Company had an authorized and invested capital
of $362,911 (or RMB 3 million). On August 1, 2005, the Company increased its
authorized and invested capital from $362,911 (or RMB 3 million) to $1,218,451
(or RMB 10 million). The Company's primary business activities involve research,
development, production, marketing and sales of environment-friendly batteries
including lithium batteries and nickel metal hydride batteries.
For accounting purposes, the reorganization above has been
accounted for as a combination between entities under common control as the
companies were controlled by the same persons before and after the
reorganization. The Company accounted for them at historical cost similar to a
pooling of interest transaction. The financial statements presented in this 10K
have been prepared as if the existing corporate structure had been in existence
throughout all periods and the reorganization had occurred as of the beginning
of the earliest period presented in the accompanying financial statements.
On July 14, 2009, TMK Shenzhen acquired 100% of the ownership
of Shenzhen Borou Industrial Co., Ltd. ("Borou"), a PRC based company
specializing in domestic and international trade business. Pursuant to the
ownership transfer agreement, TMK Shenzhen became the parent and sole owner of
Borou.
8
TMK US and its subsidiaries - Leading Asia Pacific Investment
Limited, Good Wealth Capital Investment Limited, TMK Power Industries (SZ) Co.,
Ltd., and Shenzhen Borou Industrial Co., Ltd – are collectively referred to as
the “Company.”
All of our business operations are conducted through our
Chinese subsidiaries.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of preparation
The unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") for interim financial information and the instructions
to Form 10-Q and Article 10-01 of Regulation S-X of the Securities and Exchange
Commission (“SEC”). Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for annual financial statements. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company and notes thereto contained in
our Annual Report on Form 10-K filed on March 31, 2011.
In the opinion of management, the interim financial statements
reflect all normal adjustments that are necessary to provide a fair presentation
of the financial results for the interim periods presented. Operating results
for interim periods are not necessarily indicative of results that may be
expected for an entire fiscal year. All significant inter-company balances and
transactions have been eliminated in consolidation.
b. Foreign currency translation
The functional currency of Good Wealth is Hong Kong Dollar
(“HKD”). 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.
The functional currency of TMK Shenzhen and Borou is the
Renminbi (“RMB”), the PRC’s currency. These two companies maintain their
financial statements using their own 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
Good Wealth, which are prepared in HKD, are translated into the Company’s
reporting currency, United States Dollars (“USD”); the financial statements of
TMK Shenzhen and Borou, 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.
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, 2010
|
6.61201
|
6.75950
|
|
Quarter ended March 31, 2011
|
6.57030
|
6.58762
|
|
Quarter ended March 31, 2010
|
6.83620
|
6.81896
|
- 9-
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, 2010
|
7.80000
|
7.80000
|
|
Quarter ended March 31, 2011
|
7.80000
|
7.80000
|
|
Quarter ended March 31, 2010
|
7.80000
|
7.80000
|
c. Fair values of financial instruments
US GAAP requires certain disclosures about fair value of
financial instruments. The Company defines fair value, using the required
three-level valuation hierarchy for disclosures of fair value measurement, the
enhanced disclosures requirements for fair value measures. Current assets and
current liabilities qualified as financial instruments and management believes
their carrying amounts are a reasonable estimate of fair value because of the
short period of time between the origination of such instruments and their
expected realization and if applicable, their current interest rate is
equivalent to interest rates currently available. The three levels are defined
as follows:
-
Level 1 — inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
-
Level 2 — inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for
substantially the full term of the financial instruments.
-
Level 3 — inputs to the valuation methodology are unobservable and
significant to the fair value.
Assets and liabilities measured at fair value on a recurring
basis as of March 31, 2011 and December 31, 2010 are as follows:
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets - Short Term Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Liabilities - Derivative liability
|
$
|
—
|
|
$
|
—
|
|
$
|
717,875
|
|
$
|
717,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets - Short Term Investment
|
|
—
|
|
$
|
1,512,400
|
|
$
|
—
|
|
$
|
1,512,400
|
|
|
Liabilities - Derivative liability
|
$
|
—
|
|
$
|
—
|
|
$
|
1,141,118
|
|
$
|
1,141,118
|
|
The fair value of derivative classified as Level 3 in the fair
value hierarchy changed as follows during this quarter:
|
|
|
Three Months Ended March 31
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(1,141,118
|
)
|
$
|
(1,218,744
|
)
|
|
Total gain (loss) included in
earnings
|
|
423,243
|
|
|
(1,725,233
|
)
|
|
Included in other comprehensive income
|
|
-
|
|
|
-
|
|
|
Ending balance
|
$
|
(717,875
|
)
|
$
|
(2,943,977
|
)
|
- 10-
d. Derivative liability
The Company granted a total of 3,401,320 warrants in connection
with their private placement in February 2010. 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 were valued
using the Multinomial Lattice models at each reporting periods, gain or loss
from change in fair value of derivative liability are recorded in other income
(expense).
NOTE 3: Advance for Business Acquisition
On January 4, 2010, the Company entered into a Memorandum of
Understanding (MOU) with Shenzhen DongFang Hualian Technology Ltd. (“Hualian”).
The Company paid $9,397,891 as acquisition deposit during 2010 and $865,260
during the first quarter of 2011, which shall be withdrawn based upon the MOU if
Hualian fails the due diligence and external audit procedures. The Company
completed the due diligence efforts in March 2011 and are currently negotiating
with Hualian’s management on the acquisition price/structure. The Company
expected to finalize the acquisition by the end of May 2011.
NOTE 4: SHORT-TERM BANK LOANS
Short term bank loans consist of the following:
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Bank Loans borrowed by TMK Shenzhen
|
|
|
|
|
|
|
|
Shenzhen Development Bank
|
|
-
|
|
|
1,209,920
|
|
|
|
|
|
|
|
|
|
|
Bank Loans borrowed by Borou
|
|
|
|
|
|
|
|
Industrial Bank Co. Ltd.
|
|
1,369,800
|
|
|
1,361,160
|
|
|
|
|
|
|
|
|
|
|
Short-term loans
|
$
|
1,369,800
|
|
$
|
2,571,080
|
|
On October 20, 2010, TMK Shenzhen obtained a three-month loan
in the amount of RMB 8,000,000 (or approximately $1,209,920) from Shenzhen
Development Bank bearing interest at approximately 4.86% with maturity date on
January 19, 2011. The loan was fully repaid in January 2011.
On November 22, 2010, Borou obtained a six-month term loan in
the amount of RMB 9,000,000 (or approximately $1,361,160) from Industrial Bank
Co., Ltd. bearing interest at 6.116% with maturity date on May 22, 2011. The
loan is guaranteed by Mr. Wu, Henian, Mr. Tu, Jun, Mr. Wu, Jie and Shenzhen
Shenhang Guarantee Company. This loan is borrowed under a line of credit in the
amount of RMB 10,000,000 (approximately $1,512,400) that is available from
November 19, 2010 to November 19, 2011.
The unused line of credit amounted to $152,200 and $151,240 at
March 31, 2011 and December 31, 2010, respectively.
NOTE 5: LONG-TERM BANK LOANS
Long term bank loans consist of the following:
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
DBS Bank
|
$
|
1,357,751
|
|
$
|
1,535,932
|
|
|
China Construction Bank Shenzhen Branch
|
|
2,283,000
|
|
|
2,722,320
|
|
|
Bank of Shanghai Shenzhen Branch
|
|
7,610,000
|
|
|
7,562,000
|
|
|
Bank of China Shenzhen Branch
|
|
6,088,000
|
|
|
6,049,600
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
(7,032,069
|
)
|
|
(5,159,422
|
)
|
|
Long -term portion
|
$
|
10,306,682
|
|
$
|
12,710,430
|
|
- 11-
On November 16, 2009, TMK Shenzhen obtained a three-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 PRC prime rate (“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 (was refunded to the Company during 2010). Based on the 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 as of and for the three months ended March 31, 2011.
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 defaults on the loan, the interest rate will be
increased to 150% of the 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 the 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 to
Shenzhen General Chamber of Commerce (SGCC) to secure the loan until the term
loan is repaid in full. During 2010, the Company made addition deposit of RMB
600,000 to SGCC as requested by CCB. The loan with CCB is personally guaranteed
by Mr. Wang, Zongfu and Mr. Huang, Junbiao and secured by the Company’s 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 and for the three
months ended March 31, 2011.
On June 22, 2010, TMK Shenzhen obtained a three-year term loan
from Shanghai Bank Shenzhen Branch (“SHB”) in the amount of RMB 50,000,000
(approximately $7,562,000) bearing interest at 5.508% annually with maturity
date on June 28, 2013. Pursuant to the loan agreement, the principal needs to be
paid at a fixed amount of RMB 2,000,000 (approximately $320,480) starting from
the 13
th
month until maturity date. In the event the Company defaults
on the loan, the interest rate will be increased to 150% of the prime rate. In
addition, the loan should be used for the purchase of production materials only.
If violated, the interest rate will be increased to 200% of the prime rate. The
agreement also requires that during the 12-month period after signing of the
loan agreement, the Company needs to generate international sales of no less
than RMB 50 million (approximately $7,562,000) and domestic sales of no less
than RMB 100 million (approximately $15,124,000). The loan is guaranteed by
Dongguan Yikang Metal Material Company’s properties and Mr. Wu, Henian’s
personal property. The Company did not violate any of the above covenants as of
and for the three months ended March 31, 2011.
On August 05, 2009, Borou obtained a three-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. Pursuant to the loan agreement, the loan can only be used for
working capital purposes (RMB 20,000,000) and fixed asset purchases (RMB
20,000,000). If violated, a penalty will be charged 100% 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 the loan agreement, BOC also has the 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 asset purchase loans can only be used for equipment purchases. The proceeds
will be sent to the equipment vendor directly. Any new equipment purchased under
the loan should be added to bank collateral 30 days after a 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 of and
for the three months ended March 31, 2011. In accordance with the loan
agreement, Borou also agreed to pay RMB 1,200,000 of bank charge in three years
with annual bank charge of RMB 400,000 made prior to August 30 each year.
- 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, 2011
|
|
|
December 31, 2010
|
|
|
China Construction Bank
|
$
|
365,280
|
|
$
|
362,976
|
|
|
Jiangsu Bank
|
|
-
|
|
|
907,440
|
|
|
Restricted Cash
|
$
|
365,280
|
|
$
|
1,270,416
|
|
The Company was in the process of negotiating a new loan with
Jiangsu Bank and agreed to make a deposit of RMB 6,000,000 (approximately
$907,440) with Jiangsu Bank Shenzhen Branch at December 31, 2010. The Company
did not reach to an agreement with Jiangsu Bank and the deposit was refunded to
the Company in March 2011.
NOTE 6: RELATED PARTY TRANSACTIONS
The related parties consist of the following:
|
Wu, Henian
|
CEO, Chairman & Shareholder
|
|
Tu, Lanzhen
|
Wu, Henian's wife
|
|
Wang, Zongfu
|
Director (since inception of
the Company) & Shareholder
|
|
Yu, Zhengfei
|
Wang, Zongfu’s wife
|
|
Liu, Xiangjun
|
General Manager
|
|
Huang, Junbiao
|
Director (since inception of the Company) &
Shareholder
|
|
Q-Lite Industrial Co.,
Ltd.
|
Yu, Zhengfei holds 25% of
ownership
|
|
Liu, Jun
|
Sales Manager
|
Due from related parties
Due from related parties consists of the following:
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Liu, Xiangjun
|
$
|
-
|
|
$
|
2,269
|
|
|
Total
|
$
|
-
|
|
$
|
2,269
|
|
The above amount is advance to Mr. Liu, Xiangjun for regular
business expense paid by her on behalf of the Company. The amount is
non-secured, non-interest bearing, and is considered to be short-term. The due
from balance was repaid during the first quarter of 2011and no loans to Liu,
Xiangjun are outstanding at March 31, 2011.
Due to related party
Due to related party consists of the following:
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Q-Lite Industrial Co., Ltd
|
$
|
766
|
|
$
|
4,474
|
|
|
Wu, Henian
|
|
908,062
|
|
|
902,335
|
|
|
Wang, Zongfu
|
|
378,394
|
|
|
376,008
|
|
|
Huang, Junbiao
|
|
187,878
|
|
|
186,692
|
|
|
Liu, Jun
|
|
15,606
|
|
|
15,606
|
|
|
Total
|
$
|
1,490,706
|
|
$
|
1,485,115
|
|
- 13-
During 2010, the Company borrowed $1,465,035 from Mr. Wu,
Henian, Mr. Wang, Zongfu and Mr. Huang, Junbiao to support its operational
funding needs. There was no formal agreement between the Company and those
parties, the borrowing bears no interests and will be due on demand agreed by
the related parties.
NOTE 7: 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 the PRC and has tax advantages
granted by the local government for corporate income taxes and sales taxes
commencing 2005. The Company was entitled to have a full tax exemption for the
first two profitable years, followed by a 50% reduction on normal tax rate of
24% for the following three consecutive years. The Company was approved by local
government as a high-tech company and granted tax benefits for corporate income
taxes and sales taxes commencing 2007.
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.
Beginning January 1, 2008, the new Enterprise Income Tax
(“EIT”) law has replaced the old laws for Domestic Enterprises (“DES”) and
Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaces
the 33% rate applicable to both DES and FIEs, except for High Tech companies
that pay a reduced rate of 15%, subject to government verification for Hi-Tech
company status in every three years. Companies established before March 16, 2007
continue to benefit from tax holiday treatment approved by the local government
for a grace period of either the next 5 years or until the tax holiday term is
completed, whichever is sooner.
A reconciliation between the income tax computed at the PRC
statutory rate and the Company's provision for income tax is as follows:
|
|
|
For three months ended March 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
U.S. statutory rate
|
|
34.0%
|
|
|
34.0%
|
|
|
Foreign income not recognized in the U.S.
|
|
-34.0%
|
|
|
-34.0%
|
|
|
PRC preferential enterprise income tax rate
|
|
25.0%
|
|
|
25.0%
|
|
|
Tax holiday and relief granted to the Subsidiary
|
|
-10.0%
|
|
|
-10.0%
|
|
|
Other
|
|
0.5%
|
|
|
17.3%
|
|
|
Provision for income tax
|
|
14.5%
|
|
|
32.3%
|
|
The tax authority of the PRC Government conducts periodic and
ad hoc tax filing reviews on business enterprises operating in the PRC after
those enterprises have completed their relevant tax filings, hence the Company's
tax filings may not be finalized. It is therefore uncertain as to whether the
PRC tax authority may take different views about the Company's tax filings which
may lead to additional tax liabilities.
Accounting for Uncertainty in Income Taxes
Based on the Company’s evaluation, the Company has concluded
that there are no significant uncertain tax positions requiring recognition in
its financial statements.
NOTE 8: COMMON STOCK SUBSCRIPTION
In December, 2010, the Company entered into common share
subscription agreements with seven employees to raise $506,040 capital in
exchange for 253,020 shares of common stock (at par value $0.001) . The Company
received fully payments by December 31, 2010. In January 2011, the Company and
those employees entered into an agreement to cancel the subscription agreements entered in December 2010. The
Company refunded subscription payment in full in January 2011.
- 14-
NOTE 9: COMMON STOCK WARRANTS
As of March 31, 2011 and December 31, 2010, there were
2,743,000 warrants with an exercise price of $1.60 per share outstanding and
658,320 warrants with an exercise price of $1.25 per share outstanding. No
warrants were issued or cancelled during the three months ended March 31, 2010.
NOTE 10: DERIVATIVE LIABILITIES
The Company granted a total of 3,401,320 warrants in connection
with their private placement in February 2010. 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 a 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, 2011 and December 31, 2010, the derivative
liability was valued at $717,875 and $1,141,118, respectively using the
Multinomial Lattice models. The $423,243 change in fair value is reported in the
Company’s consolidated statement of operations as a gain on derivatives. 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 December 31, 2010 - annual volatility of 50%, term of 4.11 years, risk free
rate of 2.01%, target exercise price of $2.50 for the $1.25 warrants and $3.00
for the $1.60 warrants; at March 31, 2011- annual volatility of 48%, term of
3.87 years, risk free rate of 2.24%, target exercise price of $2.50 for the
$1.25 warrants and $3.00 for the $1.60 warrants. The projected volatility is
based on average volatility of 15 comparable companies over the previous years
as the Company does not have sufficient trading history. The attributes of the
comparable companies used in volatility analysis included 1) SIC 3600
(Electrical Equipment) and 3670 (Electronics), 2) Battery and power related
products and services, 3) Market cap $38 million to $3.9 billion, 4) Global
sales and operations, and 5) Annual revenues $73 million to 1.8 billion.
NOTE 15: REVENUE INFORMATION AND GEOGRAPHIC INFORMATION
|
|
|
Three Months Ended March 31
|
|
|
|
|
2011
|
|
|
2010
|
|
|
United States
|
$
|
53,833
|
|
$
|
69,178
|
|
|
Ukraine
|
|
-
|
|
|
32,439
|
|
|
Sweden
|
|
-
|
|
|
67,517
|
|
|
Korea
|
|
59,637
|
|
|
5,257
|
|
|
Japan
|
|
-
|
|
|
1,712
|
|
|
Australia
|
|
-
|
|
|
7,489
|
|
|
Taiwan
|
|
12,212
|
|
|
31,654
|
|
|
Hong Kong
|
|
49,332
|
|
|
238,157
|
|
|
China
|
|
20,117,794
|
|
|
12,811,069
|
|
|
Total
|
$
|
20,292,808
|
|
$
|
13,264,472
|
|
- 15-
NOTE 16: RECONCILIATION OF EARNINGS PER SHARE
|
|
|
Three Months Ended March 31
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
3,385,972
|
|
$
|
(1,467,367
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
36,888,000
|
|
|
30,206,111
|
|
|
Effect of dilutive securities:
|
|
-
|
|
|
1,104,203
|
|
|
Diluted weighted-average shares outstanding
|
|
36,888,000
|
|
|
31,310,314
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.09
|
|
$
|
(0.05
|
)
|
|
Diluted
|
$
|
0.09
|
|
$
|
(0.05
|
)
|
NOTE 17: SUBSEQUENT EVENT
On March 23, 2011, TMK Shenzhen entered into a credit agreement
from DBS Bank (China) Limited Shenzhen Branch (“DBS”) to obtain a line of credit
in the amount of RMB 10,000,000 (approximately $1,522,000) in the form of AR
factoring. The loan bears interest at approximately 130% of the prevailing PRC
prime rate (“prime rate”) at the time of the loan. Based on the loan agreement,
each borrowing should be repaid within 165 days of invoice date. The agreement
has not specified an expiration date. The loan proceeds of RMB 10,000,000
(approximately $1,522,000) were received in April, 2011.
- 16-
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as “believe,” “expect,” “anticipate,” “project,”
“target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; as well as all
assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including
those identified in Item 1A “Risk Factors” in our annual report on Form 10-K for
the fiscal year ended December 31, 2010, as well as assumptions, which, if they
were to ever materialize or prove incorrect, could cause the results of the
Company to differ materially from those expressed or implied by such
forward-looking statements.
Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, except as required by law, to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.
Use of Terms
Except as otherwise indicated by the context, references in
this report to:
-
“we,” “us,” “our,” or “the Company” are to combined business of China TMK
Battery Systems Inc., a Nevada corporation, and its consolidated subsidiaries,
Leading Asia, Good Wealth, TMK and Borou;
-
“Leading Asia” are to Leading Asia Pacific Investment Limited, a BVI
company;
-
“Good Wealth” are to Good Wealth Capital Investment Limited, a Hong Kong
company;
-
“TMK” are to Shenzhen TMK Power Industries Ltd., a PRC limited company;
-
“Borou” are to Shenzhen Borou Industrial Co., Ltd., a PRC limited company;
-
“BVI” are to the British Virgin Islands;
-
“Hong Kong” are to the Hong Kong Special Administrative Region of the
People’s Republic of China;
-
“PRC,” “China,” and “Chinese,” are to the People’s Republic of China;
-
“SEC” are to the Securities and Exchange Commission;
-
“Securities Act” are to the Securities Act of 1933, as amended;
-
“Exchange Act” are to the Securities Exchange Act of 1934, as amended;
-
“Renminbi” and “RMB” are to the legal currency of China; and
-
“U.S. dollars,” “dollars” and “$” are to the legal currency of the United
States.
Overview of our Business
Through our indirect Chinese subsidiary, TMK, we design,
develop, manufacture and sell environmentally-friendly Ni-MH rechargeable
batteries, which are commonly used to power applications such as, 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.
- 17-
Historically, we have focused on the development of high-rate
types SC, C, D, and F Ni-MH rechargeable batteries and have been engaged in the
large-scale production of these products for over eight years. The target
customers of these products are mainly factories that produce power tools,
vacuum cleaners and other household electrical appliances, electric bicycles,
battery-operated toys and medical devices and whose requirements for battery
performance are higher-rate than those of the ordinary type AA and AAA batteries
used for domestic purposes.
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 backs. We are also actively seeking
opportunities to expand into the Lithium-Ion battery space. We have a lithium
battery patent and some customers who are the purchasers of both nickel-metal
hydride battery and Lithium-Ion battery. Therefore, we are searching for the
potential acquiree to develop our production capacity to meet the demand of our
customers and to grow our business, and have signed an MOU with one such company
discussed under Item 1 “Business—Our Corporate History and Background—MOU with
Hualian.” In addition, we have been actively seeking opportunities to design and
distribute batteries for use in telecommunications, traffic control, and traffic
lighting applications. We have developed working prototypes of both nickel-metal
hydride battery and Lithium-Ion battery and sent to our customers for testing
.
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.
First Quarter Financial Performance Highlights
The following are some financial highlights for the first
quarter:
-
Revenue
: Revenue increased $7.0 million, or 53%, to $20.3
million for the three months ended March 31, 2011, from $13.3 million for the
same period in 2010.
-
Gross Profit
: Gross profit increased $1.7 million, or 54%,
to $4.9 million for the three months ended March 31, 2011, from $3.2 million
for the same period in 2010.
-
Income from operations
: Income from operations increased
$2.9 million, or 318%, to $3.8 million for the three months ended March 31,
2011, from $0.9 million for the same period last year.
-
Fully diluted net income per share
: Fully diluted net income
per share was $0.09 for the three months ended March 31, 2011, as compared to
fully diluted net loss per share of $0.05 for the same period last year.
Results of Operations
The following tables set forth key components of our results of
operations for the periods indicated, both in dollars and as a percentage of
sales revenue and key components of our revenue for the periods indicated in
dollars.
Three Months Ended March 31, 2011 Compared to Three
Months Ended March 31, 2010
The following table sets forth key components of our results of
operations for the three months ended March 31, 2011 and 2010, both in dollars
and as a percentage of our net revenues.
- 18-
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
As a
|
|
|
|
|
|
|
|
percentage of
|
|
|
|
|
|
percentage
|
|
|
|
|
In Dollars
|
|
|
net revenues
|
|
|
In Dollars
|
|
|
of net revenues
|
|
|
Revenues
|
$
|
20,292,808
|
|
|
|
|
$
|
13,264,472
|
|
|
|
|
|
Cost of Goods Sold
|
|
(15,426,800
|
)
|
|
(76
|
)%
|
|
(10,105,697
|
)
|
|
(76
|
)%
|
|
Gross Profit
|
|
4,866,008
|
|
|
24%
|
|
|
3,158,775
|
|
|
24%
|
|
|
Operating Expenses
|
|
(1,031,107
|
)
|
|
(5
|
)%
|
|
(2,240,446
|
)
|
|
(17
|
)%
|
|
Operating Income
|
|
3,834,901
|
|
|
19%
|
|
|
918,329
|
|
|
7%
|
|
|
Other Income (Expense)
|
|
123,633
|
|
|
1%
|
|
|
(2,027,521
|
)
|
|
(15
|
)%
|
|
Income Taxes
|
|
(572,562
|
)
|
|
(3
|
)%
|
|
(358,175
|
)
|
|
(3
|
)%
|
|
Net Income
|
$
|
3,385,972
|
|
|
17%
|
|
$
|
(1,467,367
|
)
|
|
(11
|
)%
|
Revenues.
We derive revenues from the sale of
environmentally-friendly Ni-MH rechargeable batteries. We had revenues of $20.3
million for the three months ended March 31, 2011, an increase of $7.0 million,
or 53%, compared to $13.3 million for the three months ended March 31, 2010. The
increase was due to an increase of new customers, increased demand from existing
customers, and increased production.
Cost of Goods Sold.
Our cost of goods sold includes the
direct costs of our raw materials as well as the cost of labor and overhead. In
the three months ended March 31, 2011, our cost of goods sold increased by 53%,
from $10.1 million to $15.4 million, compared to the 2010 period. The increase
of cost of sales in the 2011 period is attributable to the increase of product
sales.
Gross Profit and Gross Margin
. Our gross profit is equal
to the difference between our revenues and our cost of goods sold. During the
three months ended March 31, 2011, the gross margin of our business was 24%,
which is consistent with the 24% margin in the same period of 2010.
Selling Expenses.
Our selling expenses consist primarily
of compensation and benefits to our sales and marketing staff, sales commission,
cost of advertising, promotion, business travel, after-sale support,
transportation costs and other sales related costs. Our selling expenses
increased $137,270, or 58%, to $371,988 in the three months ended March 31,
2011, from $234,718 in the same period in 2010. The increase is primarily due to
an increase in sales compensation, including sales commission, as
a result of the increased sales.
General and Administrative Expenses
. Our general and
administrative expenses consist primarily of compensation and benefits to our
general management, finance and administrative staff, professional advisor fees
and other expenses incurred in connection with general operations. General and
administrative expenses decreased $1.4 million, or 77%, to $0.4 million in the
three months ended March 31, 2011, from $1.8 million in the same period of 2010.
The decrease was primarily due to $1.77 million of one-time merger costs
incurred in the first quarter of 2010 in connection with our reverse
acquisition. The one-time merger cost included approximately $0.9 million in
consulting, legal, audit and transaction fees in connection with the reverse
merger, and approximately $0.86 million in financial advisory consultation and
service fees paid to our financial advisor in connection with the reverse merger
and concurrent financing.
Research and Development Expenses
. Our research and
development expenses consist of the costs associated with research and
development personnel and expense in research and development projects. Our
research and development expenses increased $15,442, or 9%, to $180,686 in the
three months ended March 31, 2011, from $165,244 million in the 2010 period, due
to our increased investment in research and development personnel to fuel future
growth.
Interest Expense.
Interest expense increased $53,057, or
22%, to $294,964 in the three months ended March 31, 2011, from $241,907 in the
2010 period. The increase in interest expense is due to the fact we borrowed
more bank loans in the three months ended March 31, 2011, compared to the same
period in 2010. This is consistent with the increase in the balance of our bank
loans outstanding at March 31, 2011, compared to March 31, 2010.
Change in Fair Value of Derivative Liability
. 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 gain from change in fair
value of derivative liability for the three months ended March 31, 2011
represents the difference of fair value between December 31, 2010 and March 31,
2011. The loss from change in fair value of derivative liability for the three months ended March 31,
2010 represents the difference of fair value between February 10, 2010
(inception date) and March 31, 2010.
- 19-
Income before Income Taxes.
Our income before income
taxes increased by $5.0 million, or 457%, to $4.0 for the three months ended
March 31, 2011, from loss before income taxes of $1.1 for the 2010 period. The
increase is primarily due to the increased gross margin, decreased operating
expenses due to one-time merger cost and increased gain from change in fair
value of derivative liability.
Net Income.
As a result of the foregoing factors,
our net income was $3.4 million for the three months ended March 31, 2011,
as compared to $1.5 million net loss for the three months ended March 31,
2010.
Liquidity and Capital Resources
As of March 31, 2011, we had cash and cash equivalents of $0.7
million. The following table summarizes the key cash flow metrics from our
condensed consolidated statements of cash flows for the three months ended March
31, 2011 and 2010.
Cash Flow
(all amounts in U.S. dollars)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Net cash provided by (used in) operating
activities
|
$
|
1,117,977
|
|
$
|
(1,147,250
|
)
|
|
Net cash provided by (used in) investing activities
|
|
1,528,927
|
|
|
(5,874,237
|
)
|
|
Net cash provided by (used in) financing
activities
|
|
(2,367,004
|
)
|
|
6,970,904
|
|
|
Effect of exchange rate changes in cash and cash equivalent
|
|
21,827
|
|
|
154,354
|
|
|
Net increase in cash and cash equivalents
|
|
301,727
|
|
|
103,771
|
|
|
Cash and cash equivalents at beginning of the period
|
|
356,871
|
|
|
185,590
|
|
|
Cash and cash equivalent at end of the
period
|
$
|
658,598
|
|
$
|
289,361
|
|
Operating Activities
Net cash provided by operating activities was $1.1 million for
the three months ended March 31, 2011, a significant improvement from $1.1
million net cash used in operating activities for the same period of 2010. Such
an increase was primarily attributed to our increased net income.
Investing Activities
Net cash provided by investing activities was $1.5 million for
the three months ended March 31, 2011, as compared to $5.9 million net cash used
in investing activities for the same period of 2010. Such a decrease was
primarily due to less capital expenditures and less cash deposit made for
business acquisition for the three months ended March 31, 2011, compared with
the same period in 2010. In addition, we received proceeds of $1.5 million from
maturity of a 6-month certificate of deposit.
Financing Activities
Net cash used by financing activities was $2.4 million during
the three months ended March 31, 2011, as compared to net cash provided by
financing activities of $7.0 million during the same period of 2010. The
decrease was mainly attributable to $8.3 million cash provided by stock issuance
or stock subscription during the three months ended March 31, 2010, while there
is no such activity in the three months ended March 31, 2011.
In February 10, 2010, we 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 of $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.
- 20-
On March 27, 2010, we issued an aggregate of 2,717,000 shares
of common stock, for a purchase price of $0.001 per share (par value), to
multiple employees for proceeds of $3,396,250.
Loan Commitments
As of March 31, 2011, the amount, maturity date and term of
each of our bank loans were as follows:
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Bank
|
|
Amount*
|
|
|
Rate
|
|
|
Maturity Date
|
|
|
Duration
|
|
|
China Construction Bank Shenzhen Branch
|
$
|
2,283,000
|
|
|
5.67%
|
|
|
January 3, 2012
|
|
|
3 Years
|
|
|
Bank of China Shenzhen Branch
|
|
6,088,000
|
|
|
5.95%
|
|
|
August 13, 2012
|
|
|
3 Years
|
|
|
DBS Bank
|
|
1,357,751
|
|
|
7.02%
|
|
|
November 20, 2012
|
|
|
3 Years
|
|
|
Bank of Shanghai Shenzhen Branch
|
|
7,610,000
|
|
|
5.508%
|
|
|
June 28, 2013
|
|
|
3 Years
|
|
|
Industrial Bank Co. Ltd.
|
|
1,369,800
|
|
|
6.116%
|
|
|
May 22, 2011
|
|
|
6 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
18,708,551
|
|
|
|
|
|
|
|
|
|
|
_____________
* Calculated based on the exchange rate of $1
= RMB 6.5703
On October 20, 2010, TMK Shenzhen obtained a three-month loan
in the amount of RMB 8,000,000 (or approximately $1,209,920) from Shenzhen
Development Bank bearing interest at approximately 4.86% with maturity date on
January 19, 2011. The loan was fully repaid in January 2011.
On November 22, 2010, Borou obtained a six-month term loan in
the amount of RMB 9,000,000 (or approximately $1,361,160) from Industrial Bank
Co., Ltd. bearing interest at 6.116% with maturity date on May 22, 2011. The
loan is guaranteed by Mr. Wu, Henian, Mr. Tu, Jun, Mr. Wu, Jie and Shenzhen
Shenhang Guarantee Company. This loan is borrowed under a line of credit in the
amount of RMB 10,000,000 (approximately $1,512,400) that is available from
November 19, 2010 to November 19, 2011.
On November 16, 2009, TMK Shenzhen obtained a three-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 PRC prime rate (“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 (was refunded to the Company during 2010). Based on the 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 as of and for the three months ended March 31, 2011.
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 13th month until maturity date. In
the event the Company defaults on the loan, the interest rate will be increased
to 150% of the 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 the 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 to Shenzhen
General Chamber of Commerce (SGCC) to secure the loan until the term loan is
repaid in full. During 2010, the Company made addition deposit of RMB 600,000 to
SGCC as requested by CCB. The loan with CCB is personally guaranteed by Mr.
Wang, Zongfu and Mr. Huang, Junbiao and secured by the Company’s 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 and for the three months ended March 31,
2011.
- 21-
On June 22, 2010, TMK Shenzhen obtained a three-year term loan
from Shanghai Bank Shenzhen Branch (“SHB”) in the amount of RMB 50,000,000
(approximately $7,562,000) bearing interest at 5.508% annually with maturity
date on June 28, 2013. Pursuant to the loan agreement, the principal needs to be
paid at a fixed amount of RMB 2,000,000 (approximately $320,480) starting from
the 13th month until maturity date. In the event the Company defaults on the
loan, the interest rate will be increased to 150% of the prime rate. In
addition, the loan should be used for the purchase of production materials only.
If violated, the interest rate will be increased to 200% of the prime rate. The
agreement also requires that during the 12-month period after signing of the
loan agreement, the Company needs to generate international sales of no less
than RMB 50 million (approximately $7,562,000) and domestic sales of no less
than RMB 100 million (approximately $15,124,000). The loan is guaranteed by
Dongguan Yikang Metal Material Company’s properties and Mr. Wu, Henian’s
personal property. The Company did not violate any of the above covenants as of
and for the three months ended March 31, 2011.
On August 05, 2009, Borou obtained a three-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. Pursuant to the loan agreement, the loan can only be used for
working capital purposes (RMB 20,000,000) and fixed asset purchases (RMB
20,000,000). If violated, a penalty will be charged 100% 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 the loan agreement, BOC also has the 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 asset purchase loans can only be used
for equipment purchases. The proceeds will be sent to the equipment vendor
directly. Any new equipment purchased under the loan should be added to bank
collateral 30 days after a 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 of and for the three months
ended March 31, 2011. In accordance with the loan agreement, Borou also agreed
to pay RMB 1,200,000 of bank charge in three years with annual bank charge of
RMB 400,000 made prior to August 30
th
of each year.
On March 23, 2011, TMK Shenzhen entered into a credit agreement
from DBS Bank (China) Limited Shenzhen Branch (“DBS”) to obtain a line of credit
in the amount of RMB 10,000,000 (approximately $1,522,000) in the form of AR
factoring. The loan bears interest at approximately 130% of the prevailing PRC
prime rate (“prime rate”) at the time of the loan. Based on the loan agreement,
each borrowing should be repaid within 165 days of invoice date. The agreement
has not specified an expiration date. The loan proceeds of RMB 10,000,000
(approximately $1,522,000) were received in April, 2011.
Obligations under Material Contracts
Except with respect to the loan obligations disclosed above, we
have no obligations to pay cash or deliver cash to any other party.
Critical Accounting Policies
There have been no changes in our critical accounting policies
from those under Item 7. “Management's Discussion and Analysis of Results of
Operations and Financial Condition” in our annual report on Form 10-K for the
fiscal year ended December 31, 2010.
- 22-
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 price changes in our industry and continually
maintain effective cost controls 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not applicable.
ITEM 4. 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, Mr. 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, 2011. Based upon, and as of the date of this
evaluation, Mr. Liu and Mr. Chang, determined that, as of March 31, 2011,
because of the material weaknesses described in Item 9A “Controls and
Procedures” on our Annual Report on Form 10-K for the fiscal year ended December
31, 2010, which we are still in the process of remediating as of March 31, 2011,
our disclosure controls and procedures were not effective. Investors are
directed to Item 9A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2010 for a description of these weaknesses.
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.
During its evaluation of the effectiveness of internal control
over financial reporting as of March 31, 2011, the management concluded that:
(1) we lacked an audit committee within our board to oversee the financial
reporting pursuant to U.S. GAAP and the SEC’s rules and regulations; and (2) our
accounting staff lacked sufficient accounting skills and experience necessary to
fulfill our public reporting obligations according to U.S. GAAP and the SEC’s
rules and regulations.
As of March 31, 2011, our management is still in the process of
implementing remediation procedures to improve internal controls over financial
reporting. We have already taken measures to remediate these material weaknesses
by seeking additional financial reporting and accounting staff members with
relevant accounting experience, skills and knowledge in the preparation of
financial statements in accordance with of U.S. GAAP and financial reporting
disclosure requirements under SEC rules. We are also in the process of implementing a
rigorous process for collecting and reviewing information required for the
preparation of the financial statements to meet our public accounting
obligations according to U.S. GAAP and the SEC’s rules and regulations with the
support from the board and additional personnel experienced in U.S. GAAP and the
SEC’s rules to be hired. Management remains committed to improving its internal
control over financial reporting and will continue to work to put effective
controls in place.
- 23-
Other than the foregoing changes, there were no changes in our
internal controls over financial reporting during period covered by this report
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. 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.
There are no material changes from the risk factors previously
disclosed under “Risk Factors” in our Registration Statement on Form 10, filed
on February 14, 2011.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. (REMOVED AND RESERVED).
ITEM 5. OTHER INFORMATION.
We have no information to disclose that was required to be in a
report on Form 8-K during the period covered by this report, but was not
reported. 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:
- 24-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
Date: May 16, 2011
|
CHINA TMK BATTERY SYSTEMS INC.
|
|
|
|
|
|
|
By:
|
/s/ Xiangjun
Liu
|
|
|
|
Xiangjun Liu, Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/ Jin
Hu
|
|
|
|
Jin Hu, Chief Financial Officer
|
|
|
|
(Principal Financial Officer and
Principal
|
|
|
|
Accounting Officer)
|
China TMK Battery Systems (PK) (USOTC:DFEL)
過去 株価チャート
から 10 2024 まで 11 2024
China TMK Battery Systems (PK) (USOTC:DFEL)
過去 株価チャート
から 11 2023 まで 11 2024
