UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-K
(Mark One)
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ANNUAL REPORT UND
ER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ___________ to ___________
Commission File No. 000-49715
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NEW ENERGY SYSTEMS GROUP
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(Name of small business issuer in its charter)
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Nevada
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91-2132336
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.)
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116 West 23rd St., 5th FL
New York, NY
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10011
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(Address of principal executive offices)
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(Zip Code)
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(917) 573-0302
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
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Title of each class registered:
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Name of each exchange on which registered:
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None
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None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.0001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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No
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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
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No
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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 during the preceding twelve months (or for such shorter time that the registrant was required to submit and post such files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K.
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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.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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No
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The aggregate market value of the registrant’s voting and non voting common equity held by non-affiliates as of June 30, 2009 based upon the closing price reported for such date on the OTC Bulletin Board was $7,624,486 as adjusted for Company's 10:1 reverse split of its common stock.
As of April 13, 2010, the registrant had 11,863,390 shares of its common stock outstanding.
Documents Incorporated by Reference
: None
EXPLANATORY NOTE
New Energy Systems Group, a Nevada corporation (the “Company”) is filing this Amendment No. 1 to its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2009, which was originally filed with the Securities and Exchange Commission (“SEC”) on April 15, 2010 (the “Original Form 10-K”), to restate the financial statements at December 31, 2009 to reflect the following:
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The Company initially valued the stock components of the acquisition price of Anytone based on the average stock price of New Energy two days before and two days after the agreement date. The Company revised the stock price used to value the stock components of the acquisitions based on the guidance at FASB ASC 805-30-30-7 that is the stock price of New Energy at the acquisition date. Accordingly, the goodwill amount was changed as a result of revised acquisition price by using the stock price at the acquisition date.
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As a result of the change of goodwill, the additional paid-in capital changed accordingly.
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The Company initially presented equity-based compensation for stock issued to consultants for services not yet provided as a contra account in equity. The Company now recorded such prepaid compensation as an asset in the balance sheet according to FASB ASC 505-50.
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The aforementioned restatement did not have any impact on the statement of income and other comprehensive income and cash flows.
The Company is also revising the following disclosures as requested by the Securities and Exchange Commission in their letters of comments:
Part I – Item 1: Business
Part I – Item 2: Properties
Part II – Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operation
Part II – Item 9A(T): Controls and Procedures
Part III – Item 10: Directors, Executive Officers and Corporate Governance
Part III – Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Part III – Item 13: Certain Relationships and Related Transactions, and Director Independence
Part IV - Item 15: Exhibits and Financial Statement Schedules
This Form 10-K/A includes new certifications as exhibits 31.1, 31.2, 32.1 and 32.2 by our principal executive officer and principal financial officer as required by Rules 12b-15 and 13a-14 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Except for the amended disclosures and reclassification described above, the information in this Form 10-K/A has not been updated to reflect events that occurred after April 15, 2010, the filing date of the Original Form 10-K. Accordingly, this Form 10-K/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Form 10-K, including any amendments to those filings.
TABLE OF CONTENTS
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PART I
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ITEM 1.
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Business
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5
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ITEM1A.
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Risk Factors
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17
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ITEM 1B.
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Unresolved Staff Comments.
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17
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ITEM 2.
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Properties
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ITEM 3.
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Legal Proceedings
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ITEM 4.
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(Removed and Reserved)
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18
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PART II
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ITEM 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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18
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ITEM 6.
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Selected Financial Data
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19
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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operation
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19
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ITEM7A.
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Quantitative and Qualitative Disclosures About Market Risk
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25
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ITEM 8.
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Financial Statements and Supplementary Data
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25
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ITEM 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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25
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ITEM 9A(T)
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Controls and Procedures
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25
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ITEM 9B.
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Other Information
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PART III
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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28
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ITEM 11.
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Executive Compensation
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30
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ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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31
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ITEM 13.
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Certain Relationships and Related Transactions, and Director Independence
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32
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ITEM 14.
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Principal Accounting Fees and Services
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32
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PART IV
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ITEM 15.
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Exhibits, Financial Statement Schedules
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33
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SIGNATURES
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35
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PART I
ITEM 1. BUSINESS
Business Development
Overview
We were incorporated in Nevada on March 27, 2001 under the name Jasmine's Garden. We operate our business through our wholly-owned subsidiaries, Billion Electronic Co., Ltd., a company organized under the laws of the British Virgin Islands on July 27, 2004 (“Billion”), Galaxy View International Ltd., a company organized under the laws of the British Virgin Islands on August 22, 2005 (“Galaxy View”), and Anytone International (H.K.) Co., Ltd. (“Anytone International”), a company organized under the laws of the People’s Republic of China (“PRC”) in 2000.
On November 15, 2004, we acquired Billion and its wholly-owned operating subsidiary, Shenzhen E'Jenie Technology Development Co., Ltd, a company incorporated under the laws of the Peoples Republic of China on July 8, 2002 (“E’Jenie”). Through E'Jenie, we manufacture and distribute lithium battery shells and related products primarily in China. Based upon specifications from its customers E'Jenie develops, customizes and produces steel, aluminum battery shells and aluminum caps. Currently, E'Jenie produces fourteen steel battery shell lines, nine aluminum battery shell lines, three aluminum battery cap lines and three steel battery cap lines.
On June 29, 2006, we acquired Galaxy View and its wholly-owned operating subsidiary Sono Digital Electronic Technologies Co., Ltd., a company incorporated under the laws of the Peoples Republic of China on May 29, 2001 (“Sono”).
In August, 2008, we entered into a related business field, battery assembly and finished battery distribution, to
diversify its line of products. We purchase batteries from suppliers, package and sell these batteries under E’Jenie’s brand name to other mobile device OEM manufacturers. These are all lithium ion batteries and have various models for different kinds of portable electronic devices.
On December 7, 2009 we acquired Anytone International (H.K.) Co., Ltd. (“Anytone International”) and its wholly owned operating subsidiary Shenzhen Anytone Technology Co., Ltd. (“Shenzhen Anytone”), a company incorporated under the laws of the Peoples Republic of China in 2005. Shenzhen Anytone is the Chinese operating subsidiary of Anytone International, collectively referred to as “Anytone”. Anytone engages in research, manufacture and sell of mobile backup power systems for mobile phones, laptops, solar, MP4, PMPs, PDAs, DC and digital applications.
History
Until December 2, 2003, we operated a nationwide wholesale and retail business selling greeting cards, note cards and gift tags made from a design process involving photography and computer graphics. On December 2, 2003, Cheering Limited, an investment holding company organized under the laws of the British Virgin Islands ("Cheering"), acquired 5,700,000 shares of our common stock, par value $0.001, which constituted approximately 95% of the then issued and outstanding shares of our common stock from Jack and Jasmine Gregory, our former officers and directors, for cash consideration of $221,221 (the "Cheering Transaction").
In connection with the Cheering Transaction, our Board of Directors appointed Zu Zhuan Xu to serve as our President, elected four designees of Cheering to serve as directors, and Jack and Jasmine Gregory resigned from their positions as officers and directors of the Company. On February 18, 2004, Zu Zhuan Xu resigned as President and Yi Bo Sun was appointed as President and Chief Executive Officer and Xu Bao Dong was appointed to serve on our Board of Directors. On February 19, 2004, another director resigned from our Board of Directors and Mr. Sun was appointed to replace him. On January 19, 2006, Mr. Sun resigned as our President and Chief Executive Office and from our Board of Directors. Changchun Zheng was elected as Chairman of the Board and Chief Executive Officer. On February 23, 2006, Yu Xi Sun was appointed as President and as a Director. On April 4, 2006 Chang Chun Zheng resigned as Chairman and Chief Executive Officer and Yu Xi Sun, the Company’s current President, was appointed to serve as interim Chairman and Chief Executive Officer. On May 30, 2006 Ran Liang was appointed as Chief Executive Officer. On July 10, 2006, Hong Liang resigned as Chief Operating Officer and as a Director of the Company and Yao Miao resigned as Chief Financial Officer. Su Yi Zheng was appointed as Chief Operating Officer and as a Director and Sarah Shao was appointed as Chief Financial Officer, both effective as of July 10, 2006. Zu Zhuang Xu, Dr. Yong Yang, Alfred L. Simon were removed from CHID’s Board of Directors on September 12, 2006. On January 4, 2007, Ran Liang resigned as Chief Executive Officer and as a member of the Board of Directors, and Xu Zhongnan was appointed as Chief Executive Officer and Chairman of the Board of Directors. On January 5, 2007, Sara Shao resigned as Chief Financial Officer, and Wu Jiangcheng was appointed as Chief Financial Officer. Su Yi Zheng resigned as Chief Operating Officer and member of the Board of Directors.
On March 17, 2004, we sold 30,000,000 shares of common stock at a per share purchase price of $0.05 to seven unaffiliated individuals in a private placement, which yielded aggregate gross proceeds of $1,500,000 (the "Private Placement"). As a condition to the closing of the Private Placement, each of the investors executed an irrevocable proxy granting Mr. Sun, our former President and Chief Executive Officer, the right to vote all shares of the common stock purchased in the Private Placement. The irrevocable proxies expired on May 1, 2004, however, the investors and Mr. Sun extended the irrevocable proxies to May 2006. Mr. Sun as the Chairman and Chief Executive Officer of Cheering is the beneficial owner of the 5,700,000 shares of common stock, which represents approximately 7.8%, of the issued and outstanding shares of our common stock and prior to the expiration of the irrevocable proxies, Mr. Sun will have the power to vote or direct the voting of 30,000,000 shares issued in the Private Placement. As a result, until the irrevocable proxies expire on May 1, 2006, Mr. Sun will control approximately 48.9% of our issued and outstanding common stock.
On April 28, 2004, we filed a certificate of amendment to our articles of incorporation with the Nevada Secretary of State to increase our authorized common stock to 140,000,000 shares and to authorize 60,000,0000 shares, par value $0.001, of blank check preferred stock.
On September 3, 2004, we filed a certificate of amendment to our articles of incorporation with the Nevada Secretary of State to change our name from "Jasmine's Garden" to "China Digital Communication Group."
Effective May 5, 2009, Mr. Zhongnan Xu resigned as our Chief Executive Officer and Chairman of the Board of Directors, and on the same day Mr. Fushun Li was appointed as our Chief Executive Officer and a Director.
Effective August 3, 2009, Jiangcheng Wu resigned as our Chief Financial Officer and Principal Accounting Officer and on the same day Junfeng Chen was named our Chief Financial Officer.
On July 13, 2009, we effected a 10-to-1 reverse split of our common stock.
Effective November 18, 2009 we changed our name from China Digital Communication Group to New Energy Systems Group.
On December 9, 2009 Weihe Yu was appointed to serve as Chairman of the Board of Directors of the Company.
Acquisition of Billion
On November 15, 2004, pursuant to a Share Exchange Agreement (the "Billion Exchange Agreement") dated as of September 17, 2004, by and among the Company, Billion, the shareholders of Billion (the "Billion Shareholders") and E'Jenie, we acquired from the Billion Shareholders (the "Billion Acquisition") all of the issued and outstanding equity interests of Billion (the "Billion Shares"). Billion is a holding company and the sole shareholder of E'Jenie. Billion has no other assets other than the shares of E'Jenie. As consideration for the Billion Shares, we paid to the Billion Shareholders an aggregate of $1,500,000 in cash and issued to them 4,566,210 shares of our common stock. The consideration for the Billion Acquisition was determined through arms length negotiations between us and Billion. As a result of the Billion Acquisition we are the sole shareholder of Billion through which we own all of the issued and outstanding equity interests of E'Jenie.
In connection with the Billion Acquisition we entered into a Guarantee Agreement, dated October 9, 2004, as amended October 11, 2004 (the "Guarantee"), with Shiji Ruichen Guaranty and Investment Co. Ltd., a company incorporated under the laws of the Peoples Republic of China ("Shiji"). Pursuant to the terms of the Guarantee, Shiji agreed to guarantee our performance and the performance of the Billion Shareholders under the Billion Exchange Agreement. As consideration for Shiji's guaranty, we issued to Shiji 1,919,016 shares of our common stock. As security for our obligations under the Guarantee, one of our principal shareholders deposited 5,000,000 of their shares of our common stock into escrow.
Acquisition of Galaxy View
On June 29, 2006, pursuant to the terms of a Share Exchange Agreement (the "Galaxy View Exchange Agreement") dated as of March 22, 2006, by and among the Company, Galaxy View, the shareholders of Galaxy View (the " Galaxy View Shareholders") and Sono, we acquired from the Galaxy View Shareholders (the "Galaxy View Acquisition") all of the issued and outstanding equity interests of Galaxy View (the "Galaxy View Shares"). As consideration for the Galaxy View Shares, we paid to the Galaxy View Shareholders an aggregate of $3,000,000 in cash and issued to them 7,575,757 shares of our preferred stock. The consideration for the Acquisition was determined through arms length negotiations between us and Galaxy View.
During the first quarter of 2007, Sono lost two of their largest customers and users of their products, the fact that the telecom industry in China was a monopoly; there was no longer a market for our products.
On April 24, 2007, the Company entered into an Agreement on Transfer of Shares of Galaxy View with Liu Changqing and Wang Feng (collectively, the Purchasers”) for the sale of our wholly-owned subsidiary Galaxy View (the “Agreement”). Changqing purchased a 60% interest and Feng will purchase a 40% interest in Galaxy View. In exchange for all of the outstanding shares of Galaxy View, the Purchasers agreed to pay $3,000,000 USD as consideration for the acquisition. We entered into promissory notes with the Purchasers for payment of their share of the $3,000,000 which is due within 90 days of April 24, 2007. If payment is not made within 90 days, the promissory notes will accrue interest at 18% per annum from the closing date. As of December 31, 2007, the amount has been paid in full.
Acquisition of Anytone
On December 7, 2007, we closed the transactions contemplated by the share exchange agreement (the “Share Exchange Agreement”) dated November 19, 2009 with Anytone International and Anytone. Pursuant to the Share Exchange Agreement, we acquired Anytone International and thereby indirectly acquired Anytone International’s Chinese operating subsidiary Anytone. Pursuant to the Share Exchange Agreement, we issued to the shareholders of Anytone International, proportionally among the Anytone International Shareholders in accordance with their respective ownership interests in Anytone International immediately before the closing of the Share Exchange, an aggregate of 3,593,939 shares of our Common Stock with standard restrictive legend, and cash consideration of US $10,000,000. As of December 31, 2009, $5,000,000 has been paid. The parties have agreed that the remaining $5,000,000 will be paid on or before June 30, 2010 with no interest.
NewPower Transaction
On December 11, 2009, we entered into a share exchange agreement (the “Share Exchange Agreement”) with Shenzhen NewPower Technology Co., Ltd. (“NewPower”), whereby Newpower would merge with and into E’Jenie. Pursuant to the Share Exchange Agreement, in exchange for all of the capital stock of Newpower, we agreed to issue to the shareholders of Newpower an aggregate of 1,823,346 shares of our Common Stock with standard restrictive legend, and pay cash consideration of US $3,000,000. This transaction was not closed until January 12, 2010.
Our Business
LITHIUM BATTERIES
Industry
The lithium battery was created in the 1990s, with its first mass production in 1993 in Japan. Lithium batteries were first used in notebook computers and now are used in cellular phones, video machines, laptops, digital cameras, MP3 players, global positioning satellite systems, 3G communication devices, hybrid cars and an array of other electronic products.
Batteries are becoming smaller, lighter, more efficient, longer lasting and free of pollution. The lithium battery's energy/weight ratio exceeds that of its counterparts and with an excellent safety standard we believe that it is the future of the battery industry. China has become one of the largest producer and consumer of lithium ion batteries. According to China Chemistry and Physics Electronic Industry Association, there were over $4.0 billion of lithium ion batteries sold in China in 2005. We anticipate that there will be even greater demand for lithium batteries in China and worldwide in the next few years. We believe that the current trend towards smaller, lighter portable consumer products will continue to grow and because of its size, the demand for the lithium battery will increase. By way of example, a mobile-phone battery has a typical usage life of 300 to 500 recharges, which translates to a ratio of 1.8 batteries in service life of each phone, according to official Chinese statistics. However, our internal data reveals that battery replacement demand is faster than this when consumers turn in their phones for new models before the normal life of the battery is over. A short product life, combined with a short product innovation cycle, result in rapid product turnover – and plenty of business for battery suppliers.
Currently, China has more than 600 million mobile phone subscribers, making it the country with the largest mobile market in the world. The mobile phone market in China is expected to maintain its growth and current estimates project that handset shipments will grow to 259.4 million units and 278.2 million units in 2010 and 2011, respectively.
China's mobile phone market is likely to grow 7.7% in 2009 despite the downward trend in the global market, with mobile handset shipments rising to 239.1 million units, according to a recent report by market research firm iSuppli. Partly boosted by the Chinese government's initiative to provide subsidies to rural residents for home electronics purchases, the world's largest mobile phone market is expected to see its new subscribers exceed 90 million by the end of 2009, and Chinese mobile phone makers are expected to ship over 360 million units to both domestic and overseas markets, representing a year-over-year increase of 20%.
Business Strategy
We seek to maintain and strengthen our position as a provider of battery shells and caps and battery applications while increasing the breadth of our product line, improving the quality of our products, integrating industrial chain and reducing production cost. In order to achieve our objective, we plan to pursue the key strategies described below.
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Successfully integrate recent acquisitions
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Improve sales and profitability of all companies.
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Increasing our international presence and expend international focus.
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Achieving deeper penetration of our existing customer base through continued innovation and high quality production and maximize cross-selling opportunities and synergies of recent acquisitions.
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Expending our product offerings and in particular, focusing on the end-user consumer market.
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Targeting higher margin OEM customers and retail partners, through private label offerings.
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Products
E’Jenie
Our wholly-owned subsidiary, E'Jenie, is an assembler and distributor of finished lithium ion batteries and a producer of the following lithium ion battery shells and caps.
Low-Carbon Steel Stretch Series.
This square shape shell series stretches the low-carbon steel plate section by section. We use superficial galvanization to custom make sizes for different customers. The characteristics of this series are that it is clean and artistic; it has smooth cuttings, and is explosion proof, wear resistant and anti-corrosive. This series is suitable for square shaped nickel hydrogen batteries, lithium ion batteries and power batteries.
F6, F8 Nickel Hydrogen and Lithium Ion Duel Functions Series.
This series stretches the low-carbon steel plate section by section and uses oil pressure to make the final form. The characteristic of this series is a smooth surface. This series is suitable for nickel Hydrogen and Lithium Ion Duel Functions Rechargeable Battery Cells.
Square Share Stainless Steel Series.
This series uses a unique processing craft to stretch stainless steel to make the square steel. The characteristics of this series are that it is anticorrosive and it does not rust. This series is suitable for the square shaped Nickel Hydrogen and Lithium Ion Battery and related components.
Aluminum Square Shell Series.
This series is developed by us by continuously extruding to form the final shell shapes. The characteristic of this series is that it is explosion proof.
Japanese Explosion-Proof Cap Series.
Included in this series is the Japanese Steel Plate Patent Product Series and the Stainless Steel Explosion-Proof Cap Series. The characteristics of the Japanese Steel Plate Patent Series are as follows:
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Low Pressure.
It can be used under low pressure condition. The pressure is affected by the thickness of the aluminum sheet and the diameter of holes within the caps.
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Strong Resistance.
The aluminum material will not become stiff or rigid and therefore the product will not crack if it is hit.
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Expanding the Gas Releasing Volume.
When the safety value is on the gas will be released.
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The Japanese Steel Plate Patent Product Series is suitable for all of lithium ion batteries.
The Stainless Steel Explosion-Proof Cap Series was developed by us and for which we own a patent. This series is suitable for lithium ion batteries used in mobile phones, calculators, MP3 players, digital camera, recorders and other electronic devices.
Distribution Methods of the Products and Services
E’Jenie has maintained long-term relationships with its principal customers which are large lithium battery manufacturers. We believe that we continually receive orders from our loyal customers because of E’Jenie’s reputation and quality of the products. Our professional marketing team maintains relationships with our current customers and at the same time searches for other potential new customers.
Anytone
Anytone is an innovative company which integrates R&D and marketing functions in one entity. In addition, Anytone is the
first company in China that engages in the development and distribution of portable mobile power products. These products are primarily used in portable consumer electronic devices, such as smartphones, digital cameras, digital camcorders, MP3 players, PMP, PDA, and PSP, to help to solve a common problem of these devices: the low capacity and un-changeability of their batteries.
Anytone's products combine aesthetics with technology. Anytone has acquired a total of 34 existing and pending patents from
the State Intellectual Property Office of the PRC: 12 patents have been obtained for the appearance design of our products, with 14 additional applications pending, while 3 patents have been obtained for certain innovative utility models, with 5 additional applications pending.
Competition
The worldwide market for lithium battery shells and caps is highly competitive. We face competition from manufacturers not only within China but also from other parts of the world, particularly Japan, Taiwan, Malaysia, Indonesia, and Korea. We compete with these companies by striving to provide a higher quality product at a lower cost. Our primary competitors are Shenzhen Luhua Co., Ltd., Shenzhen TongLi Electronic Co. and Ningbo Pulaite Electronics Co., Ltd. We believe that by doing business in China we enjoy competitive advantages over similar companies based elsewhere, such as abundant labor resources and low cost raw materials.
Manufacturing and Raw Materials
We purchase various battery components and raw materials for use in our manufacturing processes. The principal raw materials we purchase for E’Jenie are aluminum and steel. These raw materials are used for our battery shell and cover segment. The largest supplier for this segment is Shenzhen Yibao Tech. Co., Ltd. which accounted for 9% and 10% of our total purchases in 2009 and 2008, respectively. The price of steel has increased significantly in the past year, and we believe that it will continue to increase. The increases reduced our gross margins, since some of them cannot be passed on to our customers.
Since we launched our battery assembly and finished battery distribution business in August 2008, we have also purchased battery components such as batteries and packaging labels from a number of suppliers. We have three major suppliers which provided us batteries. They are Shenzhen Da Ke Battery Co., Ltd., Shenzhen Tian Lu Battery Co., Ltd., and Shenzhen Di Kai Te Battery Electronic Tech. Co., Ltd. In 2009 and 2008, they accounted for 24% and 23%, 19% and
36
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34
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30
% of our total purchases, respectively.
Anytone’s major products are portable mobile power devices, each of which needs different components. These components include, but are not limited to, solar panels, solar batteries, PCB, Polymer batteries, lithium ion batteries, LCD, and LED emitters. Since Anytone was acquired by the Company in December of 2009, two of Anytone’s largest suppliers, Shenzhen Guanghaoyu Electronics Co., Ltd., which supplies solar panels and solar batteries, and Shenzhen BAK Battery Co., Ltd., which is Anytone’s largest supplier for PCB, Lithium battery, Polymer batteries, accounted for 4% and 4% of the Company’s total purchases in 2008 and 2009, respectively.
Normally, the annual purchase plan for raw materials, such as aluminum and steel, is determined at the end of the prior calendar year or beginning of the calendar year according to past customers’ orders and our own sales forecast. Based on this plan, the Company places its purchase orders at the end of each month for the next month. Such purchase orders with key suppliers can be revised monthly in accordance with the purchase orders we received from our customers monthly. We believe this arrangement protects us from inventory surplus when the orders from customers change.
Overall, our three largest suppliers are Shenzhen Da Ke Battery Co., Ltd., Shenzhen Tian Lu Battery Co., Ltd., and Shenzhen Di Kai Te Battery Electronic Tech. Co., Ltd. which account for approximately 66% of all components and raw materials purchased. Each of them accounted for more than 10% of our purchases in 2009. Compared to 2008, our three largest vendors remained the same. Our three largest vendors in 2009 and 2008 are listed as follows:
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Vendor name
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Percentage of
Total
Purchased amount in
2009
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Percentage
of
Total Purchased amount
in 2008
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Shenzhen Da Ke Battery Co., Ltd.
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24%
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36%
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Shenzhen Tian Lu Battery Co., Ltd.
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Shenzhen Di Kai Te Battery Electronic Tech. Co., Ltd.
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Dependence on One or a Few Customers
In 2008, our five largest customers represented approximately 74.8% of our total sales. The following table sets forth information regarding our five largest customers. In 2009, due to higher sales price of our new developed battery business and we also just have one customer, one of our major customer concluded 81.8% of our sales.
MAJOR CUSTOMERS
|
Customer Name
|
|
Percentage of Total Revenue for 2008
|
|
|
Shenzhen Hua Yin Tong Battery Electronic Tech. Co., Ltd.
|
|
|
74.8
|
%
|
|
Shenzhen Huanyuda battery Electronic Tech. Co., Ltd.
|
|
|
3.7
|
%
|
|
Shenzhen Bak Battery Co., Ltd
|
|
|
3.5
|
%
|
|
Shenzhen Hui Yang Da Electronic Co., Ltd.
|
|
|
2.7
|
%
|
|
Shenzhen Yin Si Qi Electronic Co., Ltd.
|
|
|
1.9
|
%
|
|
Shenzhen Ping Bu Tech. Co., Ltd.
|
|
|
1.9
|
%
|
|
Customer Name
|
|
Percentage of Total Revenue for 2009
|
|
|
Shenzhen Hua Yin Tong Battery Electronic Tech. Co., Ltd.
|
|
|
55.9
|
%
|
|
China Electronics Shenzhen Company
|
|
|
15.4
|
%
|
|
Shenzhen Huanyuda battery Electronic Tech. Co., Ltd.
|
|
|
3.9
|
%
|
|
Shenzhen Hui Yang Da Electronic Co., Ltd.
|
|
|
3.5
|
%
|
|
Shenzhen Bak Battery Co., Ltd.
|
|
|
3.1
|
%
|
Although we do not have formal contracts with our customers, we have established long-term relationships. Our customers place orders on a monthly basis and sales are processed with purchase orders. Compared to the sales in 2008, the total sales to Shenzhen Hua Yin Tong Battery Electronic Tech. Co., Ltd. decreased in 2009. The decrease in sales percentage to Shenzhen Hua Yin Tong’s in 2009 was due to decreased sales by Shenzhen Hua Yin Tong Battery Electronic Tech. Co., Ltd., as well as sales to a new customer in 2009 (China Electronic Shenzhen Company’s) which increased our total sales and also made Shenzhen Hua Yin Tong’s sales percentage lower in 2009 than 2008. However, we believe that our relationship with Shenzhen Hua Yin Tong is good and do not anticipate a material change in their current volume of business.
Sales and Marketing
We focus our sales and marketing initiatives on becoming the leading manufacturer of caps and shells for lithium ion batteries. We promote our brand in order to build revenues, gain worldwide market share and promote consumer awareness and acceptance. Our in-house sales and marketing team contact local battery manufacturers to solicit interest in our products. If the manufacturer expresses an interest in our product offering, we ship them samples and if our products suit their needs orders are placed and filled. As of December 31, 2009, we had 42 sales and marketing personnel in total who all were located in China, of which seven people are from E’Jenie and 35 people are from Anytone.
Intellectual Property
We protect our proprietary technology through various methods such as patents and patent applications,
trademarks, non-disclosure agreements and trade secrets. We have filed and obtained a number of patents in China.
As of December 31, 2009, Anytone has been issued 15 patents by the State Intellectual Property Office.
Anytone has 15 patents, of which 12 patents are for the appearance design of the products and 3 patents are for the innovative utility model. Each of these patent’s lifetime is 10 years. The expiration of these patents range from 2017 to 2019. Additionally, Anytone has 19 patents pending patent application rights, of which 14 applications are for the appearance design of products and 5 applications are for innovative utility models.
|
Order
|
Model
|
Patent's Category
|
Received Date (Application Date)
|
Received Notice Number
|
Authorization Date (Patent Effective Date)
|
Patent Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appearance (non-embossed)
|
|
|
|
|
|
|
APC-M400B (iPhone external battery)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appearance Design
(iPhone battery)
|
|
|
|
|
|
|
|
Utility Model (Cell phone rechargeable battery)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Model ( a digital transmission mobile power)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A Solar Energy Mobile Power device (S300N)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABT-001 (Bluetooth headsets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APC-AC100 ( a portable mobile power)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, NewPower currently owns four patents for its lithium ion battery cell. Each patent is valid for a period of
10 years through August 19, 2019.
The following table sets forth all patents owned by NewPower:
|
Applicant
|
Model
|
Category
|
Application Number
|
Application Date
|
Authorization Date
|
Term
|
Due Date
|
Shenzhen NewPower Technology Co., Ltd
|
Lithium ion battery cell (053442AR)
|
|
|
|
|
|
|
Shenzhen NewPower Technology Co., Ltd
|
A Lithium ion cell's battery for cell phone
|
|
|
|
|
|
|
Shenzhen NewPower Technology Co., Ltd
|
A Lithium ion cell's battery for cell phone
|
|
|
|
|
|
|
Shenzhen NewPower Technology Co., Ltd
|
Lithium ion battery cell (053450AK)
|
|
|
|
|
|
|
Anytone and NewPower own two trademarks, one in the PRC and one in Hong Kong, and have 6 trademark applications
pending in the PRC and United States. The following is description of all such trademarks awarded and pending as of December 17, 2010:
|
Order
|
Trademark
|
Applicant
|
Area
|
Application Date
|
Application Number/ Trademark Number
|
Current Status
|
Agency
|
|
|
|
|
|
|
|
|
Beijing Xintong United Trademark Office
|
|
|
|
|
|
|
|
|
Shenzhen Longcheng Intellectual Property Agency Co., Ltd.
|
|
|
|
|
|
|
|
|
Shenzhen Guangtong Intellectual Property Agency Co., Ltd.
|
|
|
|
|
|
|
Shenzhen Guangtong Intellectual Property Agency Co., Ltd.
|
|
|
|
|
|
|
|
|
Shenzhen Guangtong Intellectual Property Agency Co., Ltd.
|
|
|
|
|
|
|
Shenzhen Guangtong Intellectual Property Agency Co., Ltd.
|
|
|
|
|
|
|
|
|
Shenzhen Guangtong Intellectual Property Agency Co., Ltd.
|
|
|
|
|
|
|
|
|
Shenzhen Goodwill and Trademark Office Co., Ltd.
|
|
|
|
|
|
|
|
|
Shenzhen Goodwill and Trademark Office Co., Ltd.
|
|
|
|
|
|
|
|
|
Tianbiao Intellectual Property Agency Co., Ltd.
|
Our subsidiary, E’Jenie, owns a proprietary trademark, No. ZC5102433SL. The trademark, issued by the State
Trademark Bureau, was issued on April 26, 2006 and is valid for 10 years through April 25, 2016.
We intend to continue to pursue the legal protection of our technology through intellectual property laws. However, we
cannot be certain that the steps we have taken to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate our propriety rights.
Governmental Approval and Regulations; Environmental Consideration
All factories in China must adhere to standards set forth by the Environmental Department and each factory must receive special permission from the Environmental Department to operate. We have officially received permission from the Environmental Department. Except as noted above, we are neither subject to any governmental regulations nor do we need governmental approvals to conduct our business.
Research and Development
The Company spent the following on research and development activities in each of the last two fiscal years:
Doing Business in China
The Chinese Legal System
The practical effect of the People's Republic of China legal system on our business operations in China can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states. Similarly, the People's Republic of China accounting laws mandate accounting practices, which are not consistent with U.S. Generally Accepted Accounting Principles. China's accounting laws require that an annual "statutory audit" be performed in accordance with People's Republic of China accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designate financial and tax authorities, at the risk of business license revocation.
Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Generally, the Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises such as E'Jenie and Anytone.
Although the Chinese government owns the majority of productive assets in China, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:
|
|
·
|
We will be able to capitalize on economic reforms.
|
|
|
·
|
The Chinese government will continue its pursuit of economic reform policies.
|
|
|
·
|
The economic policies, even if pursued, will be successful.
|
|
|
·
|
Economic policies will not be significantly altered from time to time.
|
|
|
·
|
Business operations in China will not become subject to the risk of nationalization.
|
Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.
Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included devaluations of the Chinese currency, the renminbi, restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets.
To date reforms to China's economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
Employees
As of December 31, 2009, we had four employees, three of which are executive officers and one administrative personnel. E'Jenie had seven divisions with 346 employees in total, 36 of which are supervisors; 243 of which are on the batter shell and covers’ production lines; 60 of which are on the battery’s production lines and seven of which are in sales department. Anytone had four divisions with 100 employees in total, five of which are supervisors; 60 of which are on the production lines and 35 of which are in sales department. We consider our relationships with our employees to be good. Chinese labor laws require us to provide to all of our employees certain benefits and insurance.
ITEM 1A. RISK FACTORS
Not applicable because we are a smaller reporting company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable because we are a smaller reporting company.
ITEM 2. PROPERTIES
Our manufacturing headquarters and office is located at A-3 Xinglian Industrial Zone, He Hua Ling Pingxin Road, Xin Nan, Ping Hua Town, Longgang, Shenzhen, China 518111. This facility is 6,708 square meters of which 15% or 1,000 square meters is used for offices, 4,500 square meters are used for the manufacturing line and storage and the remaining 1,208 square meters are used for employee dormitories.
Anytone’s facility is leased and located at 5F, 51 Building, No.5, Qiongyu Rd., High-tech industrial park, Nanshan District, Shenzhen, China. The lease terms are five years which started from January 1, 2009 to December 30, 2013. The facility is 2,600 square meters, of which 1,300 square meters are used for R&D and producing samples and the rest are used for offices.
Our U.S. office located at 116 West 23
rd
Street, 5
th
FL, New York, NY 10011. Currently, the Company’s U.S. office only has one employee. Therefore, the Company rented a “virtual office” instead of a physical office, at the rate of $59 per month. This virtual office is primarily used for receiving regular mails. The Company’s U.S. employee typically works from home and goes to this virtual office to pick up mails one time per week. The major duties of this employee in the U.S. office include coordinating SEC filing, maintaining investor relations and other daily email and paperwork processing.
We believe the facilities we occupy are adequate for the purposes for which they are currently used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Effective November 18, 2009 we obtained approval from FINRA to change our name to New Energy Systems Group and as of this date our new trading symbol for our Common Stock on the OTC Bulletin Board (“OTCBB”) was “NEWN.” Prior to that date, our Common Stock was quoted on the OTCBB under the symbol “CMTP”. The following table sets forth the range of high and low bid quotations for each quarter within the last fiscal year. These quotations as reported by the OTCBB reflect inter-dealer prices without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions. On July 13, 2009, we effected a 10-to-1 reverse split of our common stock, which is reflected in the table below.
|
2008
|
|
|
High
|
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
0.12
|
|
|
$
|
0.05
|
|
|
Second Quarter
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
Third Quarter
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
|
Fourth Quarter
|
|
$
|
0.09
|
|
|
$
|
0.03
|
|
|
2009
|
|
|
High
|
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
Second Quarter
|
|
$
|
0.24
|
|
|
$
|
0.03
|
|
|
Third Quarter
|
|
$
|
7.50
|
|
|
$
|
0.13
|
|
|
Fourth Quarter
|
|
$
|
10.00
|
|
|
$
|
5.40
|
|
The source of these high and low prices was the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions. The high and low prices listed have been rounded up to the next highest two decimal places.
The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.
Holders
As of April 12, 2010, in accordance with our transfer agent records, we had 123 record holders of our 11,863,390 shares of Common Stock.
Dividends
Holders of our common stock are entitled to receive dividends if, as and when declared by the Board of Directors out of funds legally available therefore. We have never declared or paid any dividends on our common stock. We intend to retain any future earnings for use in the operation and expansion of our business. Consequently, we do not anticipate paying any cash dividends on our common stock to our stockholders for the foreseeable future.
Recent Sales of Unregistered Securities
Except as previously disclosed in our quarterly reports on Form 10-Q and current reports on Form 8-K, and as set forth herein, we did not sell or issue any shares of stock.
Equity Compensation Plan Information
On November 4, 2005, the Company issued a nonqualified stock option for 10,000 shares (post-reverse stock split) to the member of the board with an exercise price of $0.53 that will expire on November 3, 2010. The option vested and became exercisable immediately. The Company’s Stock Option Incentive Plan provides for the grant of 10,000 options rights (post-reverse stock split) to a non-employee director. The Plan is administered by the Company’s Compensation Committee, who has authority to select plan participants and determine the terms and conditions of such awards.
On October 22, 2009 our Board of Directors authorized the creation of the China Digital Communication Group 2009 Equity Incentive Plan (the “Plan”). Under the Plan we issued 1,000,000 shares of our Common Stock to several individuals for services rendered. Such shares were registered by us under a Form S-8.
Options outstanding (post-reverse stock split) at December 31, 2009 and related weighted average price and intrinsic value are as follows:
|
Plan category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
|
|
Weighted-average exercise price of outstanding options, warrants and rights
(b)
|
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
(c)
|
|
Equity compensation plans approved by security holders
|
|
1,000,000
|
|
$8.81
|
|
0
|
|
Equity compensation plans not approved by security holders
|
|
10,000
|
|
$0.53
|
|
0
|
|
Total
|
|
1,010,000
|
|
$8.73
|
|
0
|
ITEM 6. SELECTED FINANCIAL DATA
Not applicable because we are a smaller reporting company.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes 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 have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” anticipate,” believe,” estimate,” continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our other Securities and Exchange Commission filings. The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. Throughout this Annual Report we will refer to New Energy Systems Group as "New Energy," the "Company," "we," "us," and "our."
BUSINESS OVERVIEW
We operate our business through our wholly-owned subsidiary E'Jenie Technology Development Co., Ltd (E’Jenie), a company incorporated under the laws of the Peoples Republic of China (PRC). Through E'Jenie, we manufacture and distribute lithium battery shells and related products primarily in China. Based upon specifications from its customers E'Jenie develops, customizes and produces steel, aluminum battery shells and aluminum caps. Currently, E'Jenie produces fourteen steel battery shell lines, nine aluminum battery shell lines, three aluminum battery cap lines and three steel battery cap lines.
We manufacture and distribute battery shells and covers for cellular phones. We maintain long-term relationships with large lithium battery manufacturers. We believe we will continually receive orders from our loyal customers because of our reputation and quality of the products. Our professional marketing team maintains relationships with our current customers and at the same time searches for other potential new customers. We seek to maintain and strengthen our position as a provider of battery shells and caps while increasing the breadth of our product line and improving the quality of our products.
The lithium battery was created in the 1990s, with its first mass production in 1993 in Japan. Lithium batteries were first used in notebook computers and now are used in cellular phones, video machines, laptops, digital cameras, MP3 players, global positioning satellite systems, 3G communication devices, hybrid cars and an array of other electronic products. Batteries are becoming smaller, lighter, more efficient, longer lasting and free of pollution. The lithium battery energy/weight ratio exceeds that of its counterparts and with an excellent safety standard we believe that it is the future of the battery industry. China has become one of the largest producers and consumers of lithium ion batteries. According to the China Chemistry and Physics Electronic Industry Association, there were over $4.0 billion of lithium ion batteries sold in China in 2005. We anticipate that there will be even greater demand for lithium batteries in China and worldwide in the next few years. We believe that the current trend towards smaller, lighter portable consumer products will continue to grow and because of its size, the demand for the lithium battery will increase.
Under the current depressed economic environment, management of the Company has made some strategic adjustments to keep the Company running and growing. On the basis of keeping the existing battery pack accessories segment, the Company has gotten into a related business field since August 2008- battery assembly and finished battery distribution, to diversify the line of products; consequently, the Company has opportunity to compete in the whole battery industry.
Having engaged in the battery business for years, management of the Company accumulated abundant knowledge about the battery industry, established a strong network among many battery companies which are on both lower and upper position of the battery distribution flow, and gained a lot of experience in battery distribution; therefore, we believe the Company is in a more favorable position than other companies in distributing finished batteries. Assembling and distributing finished batteries has a higher profit margin than manufacturing battery accessories, so management of the Company is confident the battery distribution business will be profitable due to the outstanding battery quality and the strong distribution network the Company has been building for years.
On December 7, 2009, we closed the transactions contemplated by the share exchange agreement dated November 19, 2009 with Anytone International (H.K.) Co., Ltd. (“Anytone International”) and Shenzhen Anytone Technology Co., Ltd. (“Shenzhen Anytone”). Shenzhen Anytone is a subsidiary of Anytone International, collectively referred to as “Anytone”. Pursuant to the Share Exchange Agreement, we issued to the shareholders of Anytone International 3,593,939 shares of the Company's Common Stock with a restrictive legend, and agreed to pay US $10,000,000. As of today, $5,000,000 has been paid; the remaining $5,000,000 will be paid on or before June 30, 2010 with no interest. Anytone is also engaged in production of battery and battery related products.
RESULTS OF OPERATIONS
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
The following table presents our consolidated statement of operations for the years ended December 31, 2009 and 2008. The discussion following the table is based on these results. Certain columns may not add due to rounding.
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
% of Sales
|
|
|
|
|
|
% of Sales
|
|
|
Revenue, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery
|
|
$
|
19,918,846
|
|
|
|
76
|
%
|
|
$
|
14,748,595
|
|
|
|
75
|
%
|
|
Battery shell and cover
|
|
|
6,457,044
|
|
|
|
24
|
%
|
|
|
4,967,813
|
|
|
|
25
|
%
|
|
Total revenue
|
|
|
26,375,890
|
|
|
|
100
|
%
|
|
|
19,716,408
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery
|
|
|
13,735,160
|
|
|
|
69
|
%
|
|
|
9,851,127
|
|
|
|
67
|
%
|
|
Battery shell and cover
|
|
|
4,596,379
|
|
|
|
71
|
%
|
|
|
4,158,868
|
|
|
|
84
|
%
|
|
Total cost of revenue
|
|
|
18,331,539
|
|
|
|
70
|
%
|
|
|
14,009,995
|
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,044,351
|
|
|
|
30
|
%
|
|
|
5,706,413
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
124,845
|
|
|
|
0
|
%
|
|
|
135,456
|
|
|
|
1
|
%
|
|
General and administrative expenses
|
|
|
1,213,783
|
|
|
|
5
|
%
|
|
|
586,433
|
|
|
|
3
|
%
|
|
Total operating expenses
|
|
|
1,338,628
|
|
|
|
5
|
%
|
|
|
721,889
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,705,723
|
|
|
|
25
|
%
|
|
|
4,984,524
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
55,230
|
|
|
|
0
|
%
|
|
|
78,782
|
|
|
|
0
|
.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,650,493
|
|
|
|
25
|
%
|
|
|
4,905,742
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
813,098
|
|
|
|
3
|
%
|
|
|
454,670
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,837,395
|
|
|
|
22
|
%
|
|
$
|
4,451,072
|
|
|
|
23
|
%
|
Net Revenue
Net revenue for the year ended December 31, 2009 was $26,375,890 compared to $19,716,408 for 2008, an increase of $6,659,482, or 34%. The sales of batteries of 2009 was $19,918,846 or 76% of the total revenue compared to net revenue of $14,748,595 or 75% of the total sales for 2008, an increased $5,170,251 or 35%. The increase was primarily due to the Company’s sales growth and successful development on new customers which bring continuous increase on battery business. In addition, we acquired Anytone in December of 2009, which brought us $3,424,291sales of battery.
The Company’s existing battery shell and cover business generated net revenue of $6,457,044 during the year ended December 31, 2009, compared with $4,967,813 for 2008, an increase of $1,489,231 or 30%. The increase in our sales in this segment was mainly related to a general increase in sales to existing customers as a result of the gradual recovery of the economy in China.
Cost of Sales
Cost of sales for the year ended December 31, 2009 totaled $18,331,539 or 70% of net sales, compared to $14,009,995 or 71% of net sales for the year ended December 31, 2008, an increase of $4,321,544, this increase was mainly due to increased sales and production volume.
Cost of sales of the battery assembly and distribution was $13,735,160, or 69 % of total battery revenue for 2009, compared with $9,851,127 or 67% for 2008. The Company developed purchasing techniques that enable us to remain competitive in marketing our batteries; we have limited the number of suppliers and have negotiated preferable arrangements with them.
Cost of sales related to our existing battery shell and cover business during the year ended December 31, 2009 was $4,596,379, or 71 % of sales of battery shell and cover, compared to $4,158,868 for 2008, or 84% of sales. The reduction in our cost of sales as a percentage of sales was due to our cost control efforts as well as the economies of scale on our increased production.
Operating Expense
Operating expenses for the year ended December 31, 2009 totaled $1,338,628 or 5% of net revenue compared to $721,889 or 4% of net revenue for 2008, an increase of $616,739, or 85%. The increase in our operating expenses was in connection with the increase in our sales and production.
Selling expense for the year ended December 31, 2009 totaled $124,845 compared to $135,456 for 2008.
General and administrative expenses for the year ended December 31, 2009 totaled $1,213,783 compared to $586,433 for 2008. The increase in general and administrative expenses of $627,350 was mainly due to the expenses from Anytone, a subsidiary we acquired in December 31 ,2009 as well as the noncash stock compensation expense of $251,507 that was paid to the consultants for promoting the Company’s image.
Net Income
Net income for the year ended December 31, 2009 totaled $5,837,395 compared to $4,451,072 for 2008, an increase of $1,386,323 or 31%, which was due to the reasons enumerated above.
LIQUIDITY AND CAPITAL RESOURCES
Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations and short-term borrowings. Cash and cash equivalents were $3,651,990 as of December 31, 2009. Working capital at December 31, 2009 was $4,916,639.
The following is a summary of cash provided by or used in each of the indicated types of activities during the year ended December 31, 2009 and 2008:
|
|
2009
|
|
2008
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
Operating Activities
|
|
$
|
4,564,944
|
|
|
$
|
1,184,532
|
|
|
Investment Activities
|
|
|
(5,598,172
|
)
|
|
|
(6,025
|
)
|
|
Financing Activities
|
|
|
(2,270,729
|
)
|
|
|
2,162,150
|
|
Net cash flow provided by operating activities was $4,564,944 for the year ended December 31, 2009, compared to $1,184,532 for 2008. The increase in net cash flow provided by operating activities for 2009 from 2008 was mainly due to an increase in sales, quick payment collection on accounts receivable and our effort to keep inventory low.
Net cash flow used in investment activities was $5,598,172 for the year ended December 31, 2009, compared to $6,025 in 2008. In 2009, we paid $2,998,244 for Newpower acquisition; we paid $5,000,000 (50% of cash portion of the purchase price of Anytone) for the acquisition of Anytone and received $2,401,140 cash from Anytone through the acquisition, while we purchased fixed assets for$6,025 in 2008.
Net cash flow used in financing activities was $2,270,729 for the year ended December 31, 2009 compared to net cash provided by financing activities of $2,162,150 for 2008. The increase of net cash outflow from financing activities for 2009 was mainly due to the repayment of bank loan of $2,195,872 borrowed in August of 2008.
Related Party Loans
As of December 31, 2009, the Company had a $527,225 unsecured, due on demand, and non-interest bearing loan payable to Dongrong Xu and Zaoxian Fang, the original owners of Shenzhen Anytone, for $448,141 and $79,084, respectively, in connection with the acquisition of Shenzhen Anytone by Anytone International. As of date of file this report, the Company has $549,082 outstanding.
We do not believe that inflation had a significant negative impact on our results of operations during the year ended December 31, 2009.
Working Capital Requirements
Historically cash from operations, short term financing and the sale of our Company stock have been sufficient to meet our cash needs. We believe we will be able to generate sufficient cash from operations to meet our working capital needs. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by economic environment for the industry and opportunities, availability of financing and raising capital by selling stock. We do not have any plans to sell our securities and there is no guarantee that if we do seek to sell securities in the future that we will be successful.
OFF-BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A summary of significant accounting policies is included in Note 2 to the consolidated financial statements included in this annual report. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our Company's operating results and financial condition.
Recent accounting pronouncements
In October 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In August 2009, the FASB issued an ASU regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
On July 1, 2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168 , “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”). “FASB” is short for Financial Accounting Standards Board. ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC registrants, guidance issued by the SEC. The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC. The Codification is amended to effect non-SEC changes to authoritative GAAP. Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), codified as FASB ASC Topic 810-10, which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption of SFAS 167 will have an impact on its financial condition, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB Topic ASC 860, which requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption of SFAS 166 will have an impact on its financial condition, results of operations or cash flows.
In April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic 825-10-50. This FSP 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 FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures are required beginning with the quarter ending June 30, 2009. The Company does not believe the adoption of FSP No. SFAS 107-1 and APB 28-1 will have an impact on its financial condition, results of operations or cash flows.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB ASC Topic 320-10. This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulate other comprehensive income. The Company adopted FSP No. SFAS 115-2 and SFAS 124-2 beginning April 1, 2009. This FSP had no material impact on the Company’s financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP No. SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and 820-10-50-2, provides additional guidance for estimating fair value and emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009. This FSP had no material impact on the Company’s financial position, results of operations or cash flows.
ITEM 7A. QUANTITIATIVE AND QUALITATIVE DISCLOUSURES ABOUT MARKET RISK
Not applicable because we are a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements are provided after the signature page of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securitie s Exchange Act of 1934 , as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) (the Company’s principal executive officer) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of December 31, 2009. Based upon that evaluation, the Company’s CEO and CFO noted a material weakness (see Management’s Report on Internal Control over Financial Reporting below) and concluded that the Company’s disclosure controls and procedures were not effective. Management has since implemented corrective actions designed to ensure that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and for assessing the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission (Rule 13a-15(f) under the Exchange Act of 1934, as amended), internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by its Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.
Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. The framework used by management in making that assessment was the criteria set forth in the document entitled “ Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”). Based on that assessment and the criteria set forth in the COSO Report, management concluded that at December 31, 2009, there was a material weakness and therefore, the internal control over financial reporting was not effective. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The Company’s material weakness in its internal control over financial reporting is related to a limited U.S. GAAP technical accounting expertise. The Company’s internal accounting department has primarily engaged in ensuring compliance with PRC accounting and reporting requirements for our operating affiliates. As a result, our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although the Company’s accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP matters. In order to mitigate this material weakness to the fullest extent possible, external consultants were used and the Company’s review process was strengthened. Therefore, management believes that the consolidated financial statements and other information presented herewith are materially correct. Management believes that the weakness did not have any effect on the accuracy of the Company’s consolidated financial statements for the current reporting period .
The Company has identified the following other weaknesses in our internal controls unrelated to our limited U.S. GAAP technical accounting expertise (collectively, the “Weaknesses”):
|
·
|
Lack of periodic review of our accounting manual, policy, and procedures; and
|
|
·
|
Lack of periodic review of the accounting books.
|
Although the management of our Company, including the CEO and the CFO, believes that our disclosure controls and internal controls currently provide reasonable assurance that our desired control objectives have been met, management does not expect that our disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
The Company hired a SOX consulting firm in 2009 to evaluate our SOX 404 internal control and procedures. Their primary objective was to streamline our internal control structure. The consulting firm had studied and examined our lines of responsibility and delegation of authority for our functional financial reporting areas so that they can evaluate whether responsibility lines are clearly be drawn. They documented and tested our key controls over financial reporting in 2009 and introduced key auditable internal controls and procedures integrated with our financial reporting processes. Through their studies and examinations, management realized that our internal control over financial reporting was subject to the following weaknesses, which management will need to take r emediating actions in accordance with their suggestion in 2010:
|
·
|
Lack of expertise in U.S. accounting principle among the personnel in the Company;
|
|
·
|
Dependency on U.S. external accountant and auditors for adjustments and footnote disclosures;
|
|
·
|
Lack of Internal Audit system;
|
|
·
|
Lack of adequate staffing and supervision with enough basic knowledge and requirement of SOX 404 within the accounting operations of the Company;
|
|
·
|
Lack of periodic meeting of Audit Committee;
|
|
·
|
Lack of periodic review of our accounting manual, policy, and procedures; and
|
|
·
|
Lack of periodic review of the accounting books.
|
During 2010, the Company anticipates to take the following actions with respect to our internal control over financial reporting to remediate these weaknesses:
|
·
|
Establish an audit committee, including an “audit committee financial expert ”as defined by Item 401 (h) of Regulations S-K; and
|
|
·
|
Appoint independent directors.
|
Moreover, in 2010, the Company will with our internal staff continue to conduct periodic internal control risk assessments and control testing so that we will be improving our internal control system’s integrity and to assess areas of material risk. Our internal audit staff in 2010 will develop additional control activities to ensure the effective function of our controls. The anticipated changes in internal control over financial reporting will enhance our control environment while also improving internal information flow and communication network. We will identify new risks through a constant risk assessment process and make our control activities an effective tool of monitoring our internal controls. The sole responsibility for establishing and maintaining our internal controls over financial reporting and all internal control systems improvement is that our management and company personnel including our internal audit department, which will all ensure proper and reliable financial reporting. Other than as described above, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors and Executive Officers
Set forth below is certain information relating to our directors and executive officers, including their names, ages, and positions.
|
Name
|
|
Age
|
|
Position
|
|
Date of Appointment
|
|
|
|
|
|
|
|
|
|
Fushun Li
|
|
47
|
|
Chief Executive Officer and Director
|
|
May 5, 2009
|
|
|
|
|
|
|
|
|
|
Weihe Yu
|
|
34
|
|
Chairman of the Board of Directors
|
|
December 10, 2009
|
|
|
|
|
|
|
|
|
|
Junfeng Chen
|
|
31
|
|
Chief Financial Officer and Secretary
|
|
August 3, 2009
|
Set forth below is a brief description of the background and business experience of our executive officers and directors for the past five years (and, in some instances, for prior years).
Fushun Li
Mr. Fushun Li was the founder of Shenzhen Kai Bi Te Tech. Co., Ltd. and served as its President from January 2004 to April 2009. The company was engaged in electronic components and 3C electronic products trade with revenue exceeding 1 billion RMB. From January 2001 to December 2003, Mr. Li was the president of Shenzhen Guanxu Electronics Co., Ltd. He conducted a numbers of reforms and greatly improved company management. From November 1995 to December 2000, Mr. Li was the vice president of Guanzhou Xunxing Communication Equipment, a subsidiary of China Telecommunications Corporation. During these years, he improved the company’s product line from single to diversity and increased the company’s sales from 50 million RMB to 300 million RMB, as well as the net profits. From January 1992 to October 1995, Mr. Li worked as assistant president in Shenzhen Jingkong Chaoying Electronic Industry Co., Ltd. Mr. Li graduated from Huangshi Institute of Technology with business management major in September 1985.
Weihe Yu
Mr. Weihe Yu has spent his career in the industrial sector where he has demonstrated his ability to maximize performance, streamline costs and increase sales. Most recently, he was one of the founders and the general manager of Shenzhen Anytone Technology Co., Ltd. After only three years the company became a leader in the mobile power industry with many patents and core technologies. Under his management, Anytone has become a highly recognized brand and the company’s revenue has grown more than 100% annually over the past four years. Prior to Anytone, Mr. Yu was general manager of Shenzhen Four Images Industrial Co., Ltd. whose business is to create protection circuits for lithium ion batteries. During his tenure there, the company’s proprietary products were at the forefront of the industry and widely used by the largest customers of lithium ion batteries. From 1998 to 2000, Mr. Yu served in key management positions at the Yangxin Aluminum Alloy Wheel Co., Ltd, an automobile alloy wheel manufacturer. In his role there, he created a comprehensive marketing management and performance appraisal system that greatly enhanced the performance of the company. Mr. Yu graduated from the Huangshi Institute of Technology in Hubei Province in 1998.
Junfeng Chen
Junfeng Chen, has worked in the Company since 2005. Prior to this appointment, Mr. Chen was the Chief Financial Officer of our wholly-owned subsidiary Shenzhen E’Jenie Science and Technology Co., Ltd. (“Shenzhen E’Jenie) since February 2006. From March 2005 to January 2006, Mr. Chen served as the assistant of financial manager in Shenzhen E’Jenie. Junfeng Chen worked as an accountant in Henan Labor Department Officer in Dongguan City, Guangdong Province, P.R.C and focused on processing the daily financial works for the office from February 2004 to December 2004. He also worked as an accountant in the Dongguan Shatian Yumao Textile Mill from October 2001 to December 2003. Junfeng Chen majored in Accounting and graduated from Wuhan University in China in 2001.
The Board believes that each of the Company’s directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the Company’s shareholders. When evaluating candidates for election to the Board, the Board seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, and leadership skills. The Board has also considered the fact that all of our directors have rich experience in their professional area or in our business related industry. The Board believes that through their different backgrounds, they bring a wealth of experiences, new ideas and solution to the Board. In particular, the Board has noted that our directors have the following skills and qualifications that, among others, have made them suited to serve as directors of the Company:
Mr. Weihe Yu, Chairman, 34 years old with a bachelor’s degree in Mechanical Engineering. Mr. Yu’s strength is in R&D but also has great leadership ability. He has worked in the lithium ion battery industry for more than 10 years. Before he was appointed as Chairman of New Energy Systems Group, he was the cofounder of Shenzhen Anytone Technology Co., Ltd. From July 2005 to December 2009, he served as Anytone’s CEO and led Anytone to become the leading company in the portable mobile power industry during this period. Before that, he served as general manager of Shenzhen Four Images Industrial Co., Ltd. This company was committed to the development and sale of the protection circuit of lithium ion batteries. Mr. Yu also previously served as marketing director, manager assistant, and vice general manager in Yangxin Aluminum Wheel Co., Ltd from July 1998 to December 2000. He created a comprehensive marketing management system and performance appraisal system which improved the company’s performance dramatically.
Mr. Fushun Li, CEO and director, 47 years old with a bachelor’s degree in business management. The Board believes that Mr. Li’s strength is in corporate management. He had more than 20 years experience in corporate management area in many industries. Mr. Fushun Li was the founder of Shenzhen Kai Bi Te Tech. Co., Ltd. and served as its President from January 2004 to April 2009. The company was engaged in electronic components and 3C electronic products trade with revenue exceeding RMB 1 billion. From January 2001 to December 2003, Mr. Li was the president of Shenzhen Guanxu Electronics Co., Ltd. He conducted a number of reforms and greatly improved company management. From November 1995 to December 2000, Mr. Li was the vice president of Guanzhou Xunxing Communication Equipment, a subsidiary of China Telecommunications Corporation. During these years, he diversified the company’s product line and increased the company’s sales from RMB 50 million to RMB 300 million. From January 1992 to October 1995, Mr. Li worked as assistant president in Shenzhen Jingkong Chaoying Electronic Industry Co., Ltd.
Director Compensation
None of our directors receive any compensation for their services as a member of the board of directors, except as set forth in Item 11 below.
Family Relationships
There are no family relationships among any of our officers or directors.
Involvement in Certain Legal Proceedings
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:
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Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
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Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
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Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
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·
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Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
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·
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Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
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Committees of the Board of Directors
There are no committees of the Board of Directors.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of the our common stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our company with copies of all Section 16(a) reports they file.
Based solely on our review of the copies of such reports received by us, and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended December 31, 2009, our officers and directors, and all of the persons known to us to own more than 10% of our common stock, filed all required reports on a timely basis except that Fushun Li, Junfeng Chen, Weihe Yu, and Guofu Xiong were each late in filing a Form 3.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive officer and senior financial officers. Please see Item 15, Exhibit 14.1.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation paid by us to our officers and directors during the three most recent fiscal years. This information includes the dollar value of base salaries, bonus awards and number of stock options granted, and certain other compensation, if any.
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Non-
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Nonqualified
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Name
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Equity
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Deferred
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All
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and
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Stock
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Option
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Incentive
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Compensation
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Other
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Principal
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Salary
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Bonus
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Awards
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Awards
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Plan
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Earnings
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Compensation
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Total
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Position
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Year
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(US$)
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(US$)
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(US$)
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(US$)
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(US$)
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(US$)
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(US$)
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(US$)
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(a)
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(b)
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(c)
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(d)
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(e)
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(f)
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(g)
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(h)
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(i)
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(j)
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Zhongnan Xu
|
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2009
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$
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0
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0
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0
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0
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0
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0
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0
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$
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0
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Former CEO and Chairman
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2008
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0
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0
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0
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0
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|
0
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0
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0
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0
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2007
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0
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0
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|
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|
0
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|
|
0
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|
|
|
0
|
|
|
|
0
|
|
|
|
0
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0
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Jiangcheng Wu
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2009
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$
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0
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0
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0
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0
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0
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0
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0
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$
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0
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Former CFO
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2008
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0
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0
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0
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|
0
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|
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|
0
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|
0
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|
|
|
0
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|
0
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2007
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|
0
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|
|
|
0
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|
|
|
0
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|
|
|
0
|
|
|
|
0
|
|
|
|
0
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|
|
|
0
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0
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Weihe Yu
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2009
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$
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1,523
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0
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0
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0
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0
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0
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0
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$
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1,523
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Chairman
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Fushun Li
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2009
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$
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5882
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0
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0
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0
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0
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0
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0
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$
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5,882
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CEO and Director
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Junfeng Chen
CFO
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2009
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$
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10,294
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0
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0
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0
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0
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0
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0
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$
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10,294
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Employment Agreements
We have employment agreement with our directors and officers. The basic information is as following:
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Name
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Position
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Term
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Annual Salary
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Weihe Yu
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Chairman
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Dec. 2009~ Dec. 2012
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$26,470
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Fushun Li
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CEO
|
Jul., 2009~Jul., 2012
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$17,647
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Junfeng Chen
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Interim CFO
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Sep., 2009~Sep., 2010
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$17,647
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Compensation of Directors
Except as set forth above, we have no arrangements for the remuneration of officers and directors, except that they will be entitled to receive reimbursement for actual, demonstrable out-of-pocket expenses, including travel expenses, if any, made on our behalf in the investigation of business opportunities. Other than as reflected in the table above, no remuneration has been paid to our officers or directors. Except as set forth above, there are no agreements or understandings with respect to the amount or remuneration those officers and directors are expected to receive in the future. As of the date of this Annual Report, no stock options have been issued to our officers or directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer and president and (iv) all executive officers and directors as a group as of March 31, 2010.
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Amount and Nature of Beneficial Ownership (1)
|
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Name and Address of
Beneficial Owner
|
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Common Stock
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Options
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Preferred Shares (2)
|
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Total
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|
Percentage of
Common
Stock (%)(2)
|
|
|
Percentage of Preferred Shares (%)(3)
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|
Percentage of
Voting Power (%)(2)
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Owner of More than 5% of Class
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Jin Meibin
Unit 57-71 High Tech Industrial Park, Nan Shan District, Shenzhen, PRC 518050
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Ruxiang Pan
Unite No. 5A, Zuanshi Ge. Fuqiang Yi Tian Ming Yuan, Futian District, Shenzhen, Guangdong Province, PRC
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Huoqing Yang
Haoyuan Chemical Company Limited
Chengming Industrial Park, Shouguang City, Shandong Province, PRC
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Ruizheng Cheng
2C-502 Yude Juayuan, Nanshan District, Shenzhen, Guangdong Province, PRC
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Xiaohong Peng
501 Building A, Lixin Village, Xuefu Road, Nanshan District, Shenzhen, Guangdong Province,PRC
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Guofu Xiong
Dahonshan Iron No. 168 Wuchang Blved, Echeng District, Ezhou City, Hubei Province, PRC
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Gold River Industrial Holding Limited (4)
Room 806, Decheng Building, No 20, Queens E. Blvd., Hong Kong, China
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Directors and Executive Officers (10)
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Fushun Li
Chief Executive Officer, Director
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Junfeng Chen
Chief Financial Officer
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All Directors and Executive Officers (6 persons)
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(1) In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of that date. In determining the percent of common stock owned by a person or entity on March 31, 2010, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on March 31, 2010 (11,863,390), and (ii) the total number of shares that the beneficial owner may acquire upon conversion of the preferred and on exercise of the options. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.
(2) Each share of Series A Preferred Stock carries seven votes and converts into one-tenth of a share of common stock. Voting power percentages are expressed on a pre-conversion basis. The number of shares of common stock underlying the Series A Preferred Stock, on an as-converted basis, for Jin Meibin, Ruxiang Pan, and Huoquin Yang is 250,000, 27,273, and 255, 303 shares, respectively.
(3) The total shares of Series A Preferred Stock outstanding on March 31, 2010 was 7,575,757.
(4) Weihe Yu holds sole voting and dispositive power over the shares held by Gold River Industrial Holding Limited.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
As of December 31, 2008, the Company had an unsecured, due on demand, and non interest-bearing loan from a shareholder,
Xuemei Fang, of $174,600, which was repaid by the end of 2009. Xumei Fang is the legal representative and former shareholder of Shenzhen E'Jenie Technology Development Co., Ltd.
As of December 31, 2009, the Company had $527,225 unsecured, due on demand, and non-interest bearing loans payable to
Dongrong Xu and Zaoxian Fang, the original owners of Shenzhen Anytone, for $448,141 and $79,084, respectively, in connection with the acquisition of Shenzhen Anytone by Anytone International. Dongrong Xu is Shenzhen Anytone’s legal representative and former shareholder, and Zaoxian Fang is Shenzhen Anytone’s former shareholder.
As of
December 31, 2009
, the Company has $527,225 outstanding.
As of December 31, 2009, the Company had $262,380 unsecured, due on demand, and non interest-bearing advance to the original owners of Anytone International.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
On June 10, 2009, we dismissed Kabani & Company, Inc. (“Kabani”) as its independent registered public accounting firm. The Company’s Board of Directors participated in and approved the decision to change our independent registered public accounting firm. Kabani’s reports on our financial statements for the years ended December 31, 2007 and 2008 and during the subsequent interim period through June 10, 2009 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. During the years ended December 31, 2007 and 2008 and during the subsequent interim period through June 10, 2009, there were no disagreements on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with Kabani’s opinion to the subject matter of the disagreement. During the years ended December 31, 2007 and 2008 and during the subsequent interim period through June 10, 2009, there have been no reportable events with the Company as set forth in Item 304(a)(i)(v) of Regulation S-K.
On June 10, 2009, we appointed Goldman Parks Kurland Mohidin LLP (“GPKM”) as the Company’s new independent registered public accounting firm. The decision to engage GPKM was approved by the Company’s Board of Directors on June 10, 2009. During the years ended December 31, 2007 and 2008 and during the subsequent interim period through June 10, 2009, the Company did not consult with GPKM regarding (1) the application of accounting principles to a specified transactions, (2) the type of audit opinion that might be rendered on the Company’s financial statements, (3) written or oral advice was provided that would be an important factor considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issues, or (4) any matter that was the subject of a disagreement between the Company and its predecessor auditor as described in Item 304(a)(1)(iv) or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
(1) Audit Fees
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for our audit of annual financial statements and review of financial statements included in our Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years was:
|
2009
|
|
$
|
60,000
|
|
Goldman Parks Kurland Mohidin LLP
|
|
2008
|
|
$
|
50,000
|
|
Kabani & Company, Inc.
|
Audit Related Fees
There is an one-time charge of $7,500 for our prior auditor, Kabani & Company, Inc., to review our annual report for the years ended December 31, 2009 and 2008.
Tax Fees
For the Company’s fiscal years ended December 31, 2009 and 2008, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2009 and 2008.
Pursuant to the requirements of Section 13 or 15(d) 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.
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:
|
-
|
approved by our audit committee; or
|
|
-
|
entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.
|
We do not have an audit committee. Our entire board of directors pre-approves all services provided by our independent auditors. The pre-approval process has just been implemented in response to the new rules. Therefore, our board of directors does not have records of what percentage of the above fees were pre-approved. However, all of the above services and fees were reviewed and approved by the entire board of directors either before or after the respective services were rendered.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
a) Documents filed as part of this Annual Report
1. Financial Statements
2. Financial Statement Schedules
3. Exhibits
|
Exhibit No.
|
Title of Document
|
|
Location
|
|
2.1
|
Share Exchange Agreement, dated February 14, 2006, between us, UPE Limited (Far East), Shenzhen Zhuo Tong Power Supply Industry Co., Ltd., and the shareholders of UPE Limited
|
|
Incorporated by reference as Exhibit 2.1 to Form 8-K filed February 21, 2006
|
|
2.2
|
Amended and Restated Share Exchange Agreement, dated March 22, 2006, between us, Galaxy View International Ltd., Shenzhen Sono, and the shareholders of Galaxy View International Ltd.
|
|
Incorporated by reference as Exhibit 2.1 to Form 8-K filed March 24, 2006
|
|
2.3
|
Share Exchange Agreement and Plan or Reorganization
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K filed September 29, 2004
|
|
3.1.1
|
Articles of Incorporation
|
|
Incorporated by reference as Exhibit 3(i)(1) to Form 8-K filed September 16, 2004
|
|
3.1.2
|
Amendment to Articles of Incorporation
|
|
Incorporated by reference as Exhibit 3(i)(2) to Form 8-K filed September 16, 2004
|
|
3.1.3
|
Amendment to Articles of Incorporation
|
|
Incorporated by reference as Exhibit 3(i)(3) to Form 8-K filed September 16, 2004
|
|
3.1.4
|
Certificate of Designation of Series A Convertible Preferred Stock
|
|
Incorporated by reference as Exhibit 3(i) to Form 8-K filed July 28, 2006
|
|
3.1.5
|
Certificate of Amendment to Articles of Incorporation
|
|
Incorporated by reference as Exhibit 3.1 to Form 8-K filed on November 19, 2009
|
|
3.1.6
|
Amendment to the Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock
|
|
Incorporated by reference as Exhibit 3.1 to Form 8-K filed on October 21, 2010.
|
|
3.2
|
Bylaws
|
|
Incorporated by reference as Exhibit 3.4 to Form SB-2/A filed March 22, 2002
|
|
4.1
|
Form of Stock Certificate
|
|
Incorporated by reference as Exhibit 4.1 to Form SB-2/A filed March 22, 2002
|
|
4.2
|
2004 Equity Incentive Plan
|
|
Incorporated by reference as Exhibit 4.1 to Form S-8 filed March 2, 2004
|
|
4.3
|
Form of Class A, B and C Warrants
|
|
Incorporated by reference as Exhibit 4.3 to Form 10-KSB filed March 30, 2006
|
|
4.4
|
Form of Subscription Agreement dated March 17, 2004 by and among Jasmine's Garden and the Investors
|
|
Incorporated by reference as Exhibit 4.1 to Form 8-K filed March 22, 2004
|
|
10.1
|
Sales Contract dated April 21, 2005 between Shenzhan E'Jenine Science & Technology Co., LTD. and Shenzhen Gao Yi Electonics Co. LTD.
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K filed April 22, 2005
|
|
10.2
|
Sales Contract dated July 12, 2005 between Shenzhan E'Jenine Science & Technology Co., LTD. and Wuhan Jie Xin Communication Development Co., LTD.
|
|
Incorporated by reference as Exhibit 2.1 to Form 8-K filed July 14, 2005
|
|
10.3
|
Sales Contract dated December 31, 2005 between Shenzhan E'Jenine Science & Technology Co., LTD. and Yin Si Qi Electronics Co.
|
|
Incorporated by reference as Exhibit 2.1 to Form 8-K filed January 6, 2006
|
|
10.4
|
Loan Agreement dated March 10, 2006, between New Energy Systems Group and United Private Equity (The Pacific) Limited
|
|
Incorporated by reference as Exhibit 2.1 to Form 8-K filed March 15, 2006
|
|
10.5
|
Employment Agreement dated December 10, 2009 between New Energy Systems Group and Weihe Yu
|
|
Filed herewith
|
|
10.6
|
Employment Agreement dated July 1, 2009 between New Energy Systems Group and Fushun Li
|
|
Filed herewith
|
|
10.7
|
Employment Agreement dated September 1, 2009 between New Energy Systems Group and Junfeng Chen
|
|
Filed herewith
|
|
10.8
|
Share Exchange Agreement, dated November 10, 2010, by and among Shenzhen Anytone Technology Co. Ltd, Shenzhen Kim Fai Solar Energy Technology Co., Ltd., and the Company.
|
|
Incorporated by reference as Exhibit 10.1 to Form 8-K filed November 12, 2010
|
|
10.9
|
Lease Agreement, dated August 28, 2009, by and between Shenzhen Longgang District Tailian Industrial Development Co., Ltd. and Shenzhen NewPower Technology Co., Ltd.
|
|
Incorporated by reference as Exhibit to 10.10 to Form 10-K filed March 28, 2011
|
|
10.10
|
Lease Agreement, dated January 1, 2009, by and between China Great wall calculator Shenzhen Co., Ltd. And Shenzhen Anytone Technology Co., Ltd.
|
|
Incorporated by reference as Exhibit to 10.10 to Form 10-K filed March 28, 2011
|
|
10.12
|
China Digital Communication Group 2009 Equity Incentive Plan
|
|
Incorporated by reference to the Registration Statement on Form S-8 filed on October 28, 2009
|
|
10.13
|
Employment Agreement, dated September 1, 2008, by and between Nian Chen and Shenzhen Anytone Technology Co., Ltd.
|
|
Incorporated by reference as Exhibit to 10.10 to Form 10-K filed March 28, 2011
|
|
10.14
|
Lease Agreement, dated December 23, 2005, by and between Kim Fai
|
|
Incorporated by reference as Exhibit to 10.10 to Form 10-K filed March 28, 2011
|
|
14.1
|
Code of Ethics
|
|
Incorporated by reference as Exhibit 14.1 to Form 10-KSB filed March 30, 2006
|
|
21.1
|
Subsidiaries
|
|
Filed herewith
|
|
31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
NEW ENERGY SYSTEMS GROUP
|
|
|
|
|
|
Date: June 6, 2011
|
By:
|
/s/
Nian Chen
|
|
|
|
Nian Chen
|
|
|
|
Chief Executive Officer
|
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Nian Chen
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
June 6, 2011
|
|
Nian Chen
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Junfeng Chen
|
|
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
|
June 6, 2011
|
|
Junfeng Chen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Weihe Yu
|
|
Chairman – Board of Directors
|
|
June 6, 2011
|
|
Weihe Yu
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Elan Yaish
|
|
Director
|
|
June 6, 2011
|
|
Elan Yaish
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Shuxuan Cui
|
|
Director
|
|
June 6, 2011
|
|
Shuxuan Cui
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Li Liu
|
|
Director
|
|
June 6, 2011
|
|
Li Liu
|
|
|
|
|
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
(
FORMERLY, CHINA DIGITAL COMMUNICATION GROUP AND SUBSIDIARIES
)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
TABLE OF CONTENTS
|
Report of Independent Registered Public Accounting Firm
|
F-1-2
|
|
|
|
|
Consolidated Balance Sheets
|
F-3
|
|
|
|
|
Consolidated Statements of Income and Comprehensive Income
|
F-4
|
|
|
|
|
Consolidated Statements of Cash Flows
|
F-5
|
|
|
|
|
Consolidated Statements of Changes in Stockholders’ Equity
|
F-6
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-7-23
|
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
New Energy Systems Group
We have audited the accompanying balance sheet of New Energy Systems Group and subsidiaries (formerly China Digital Communication Group and Subsidiares) as of December 31, 2009 and the related statements of income and comprehensive income, stockholders' equity, and cash flows for the year ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of New Energy Systems Group and subsidiaries (formerly China Digital Communication Group and Subsidiares) as of December 31, 2009, and the results of their operations and their cash flows for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 17, the 2009 financial statements have been restated to correct a misstatement.
Goldman Kurland and Mohidin LLP
Encino, California
April 9, 2010
, except for notes 10, 15 and 17 for which the date is May 24, 2011.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
China Digital Communication Group and Subsidiaries, Inc.
We have audited the accompanying consolidated balance sheet of China Digital Communication Group and Subsidiaries, Inc. (a Nevada corporation) as of December 31, 2008, and the related consolidated statements of operation, stockholders' equity, and cash flows for the year ended December 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Digital Communication Group and Subsidiaries, Inc. as of December 31, 2008, and the consolidated results of their operations and their consolidated cash flows for the year ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
As explained in Note 13 to the accompanying financial statements, one customer accounted for 100% of the companies revenue from the sales of batteries, which accounted for 75% of the companies total revenue for the year ended December 31, 2008. Three vendors provided 100% of batteries to the company in the year ended December 31, 2008.
/s/ Kabani & Company, Inc.
Certified Public Accountants
Los Angeles, California
March 6, 2009
|
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
(RESTATED)
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
3,651,990
|
|
|
$
|
6,969,454
|
|
|
|
|
|
9,776,041
|
|
|
|
7,407,371
|
|
|
|
|
|
502,702
|
|
|
|
759,477
|
|
|
|
|
|
262,380
|
|
|
|
-
|
|
|
|
|
|
433,804
|
|
|
|
-
|
|
|
|
|
|
675,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,301,917
|
|
|
|
15,136,302
|
|
|
|
|
|
|
|
|
|
|
|
Plant, property & equipment, net
|
|
|
699,790
|
|
|
|
859,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment for Newpower acquisition
|
|
|
2,999,473
|
|
|
|
-
|
|
Deferred Compensation-noncurrent
|
|
|
1,773,493
|
|
|
|
-
|
|
|
|
|
|
37,626
|
|
|
|
-
|
|
|
|
|
|
19,775,939
|
|
|
|
-
|
|
|
|
|
|
15,772,344
|
|
|
|
880,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,358,875
|
|
|
|
880,920
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
56,360,582
|
|
|
$
|
16,876,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
9,095,623
|
|
|
$
|
3,467,324
|
|
|
|
|
|
762,430
|
|
|
|
399,519
|
|
|
|
|
|
-
|
|
|
|
2,200,500
|
|
Loan payable to related party
|
|
|
527,225
|
|
|
|
174,600
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,385,278
|
|
|
|
6,241,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,001,584
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,386,862
|
|
|
|
6,241,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 7,575,757
|
|
|
|
|
|
|
|
|
shares authorized, 7,575,757 shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
7,576
|
|
|
|
7,576
|
|
Common stock, $.001 par value, 140,000,000
|
|
|
|
|
|
|
|
|
shares authorized, 11,863,390 and 5,446,105
|
|
|
|
|
|
|
|
|
shares issued and outstanding at December 31,
|
|
|
|
|
|
|
|
|
2009 and 2008, respectively
|
|
|
11,863
|
|
|
|
5,446
|
|
Additional paid in capital
|
|
|
42,697,186
|
|
|
|
16,999,362
|
|
|
|
|
|
2,070,081
|
|
|
|
593,445
|
|
Other comprehensive income
|
|
|
1,225,986
|
|
|
|
1,144,170
|
|
|
|
|
|
(3,038,972
|
)
|
|
|
(8,115,488
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
42,973,720
|
|
|
|
10,634,511
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
56,360,582
|
|
|
$
|
16,876,454
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
(
FORMERLY, CHINA DIGITAL COMMUNICATION GROUP AND SUBSIDIARIES
)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
|
|
|
|
|
|
|
Battery
|
|
|
$
|
19,918,846
|
|
|
$
|
14,748,595
|
|
|
Battery shell and cover
|
|
|
6,457,044
|
|
|
|
4,967,813
|
|
|
|
Total revenue
|
|
|
26,375,890
|
|
|
|
19,716,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
Battery
|
|
|
|
13,735,160
|
|
|
|
9,851,127
|
|
|
Battery shell and cover
|
|
|
4,596,379
|
|
|
|
4,158,868
|
|
|
|
Total cost of revenue
|
|
|
18,331,539
|
|
|
|
14,009,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,044,351
|
|
|
|
5,706,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
124,845
|
|
|
|
135,456
|
|
|
General and administrative expenses
|
|
|
1,213,783
|
|
|
|
586,433
|
|
|
|
Total operating expenses
|
|
|
1,338,628
|
|
|
|
721,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,705,723
|
|
|
|
4,984,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous expense
|
|
|
(5,794
|
)
|
|
|
(40,257
|
)
|
|
Interest expense
|
|
|
(49,436
|
)
|
|
|
(38,525
|
)
|
|
|
Total other expenses
|
|
|
(55,230
|
)
|
|
|
(78,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,650,493
|
|
|
|
4,905,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(813,098
|
)
|
|
|
(454,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
5,837,395
|
|
|
|
4,451,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
81,816
|
|
|
|
289,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
5,919,211
|
|
|
$
|
4,740,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
|
$
|
0.82
|
|
|
Diluted
|
|
$
|
0.82
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,393,067
|
|
|
|
5,446,105
|
|
|
Diluted
|
|
|
7,150,642
|
|
|
|
6,203,638
|
|
The accompanying notes are an integral part of these consolidated financial statements
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
(
FORMERLY, CHINA DIGITAL COMMUNICATION GROUP AND SUBSIDIARIES
)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Year ended December 31,
|
|
|
Year ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5,837,395
|
|
|
$
|
4,451,072
|
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
468,514
|
|
|
|
308,786
|
|
|
Deferred tax liability
|
|
|
(31,916
|
)
|
|
|
-
|
|
|
Non-cash, stock compensation
|
|
|
251,507
|
|
|
|
-
|
|
|
Loss on disposal of subsidiary
|
|
|
7,794
|
|
|
|
-
|
|
|
(Increase) / decrease in current assets:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,730,909
|
)
|
|
|
(7,011,157
|
)
|
|
Inventory
|
|
|
2,572,107
|
|
|
|
186,132
|
|
|
Other receivable
|
|
|
1,670
|
|
|
|
-
|
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
1,726
|
|
|
Deposits
|
|
|
-
|
|
|
|
8,530
|
|
|
Increase/(Decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(3,326,375
|
)
|
|
|
2,654,437
|
|
|
Taxes payable
|
|
|
515,157
|
|
|
|
585,006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,564,944
|
|
|
|
1,184,532
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Acquisition of Anytone
|
|
|
(5,000,000
|
)
|
|
|
-
|
|
|
Cash acquired in acquisition
|
|
|
2,401,140
|
|
|
|
-
|
|
|
Prepayment for Newpower acquisition
|
|
|
(2,998,244
|
)
|
|
|
-
|
|
|
Acquisition of property & equipment
|
|
|
(1,068
|
)
|
|
|
(6,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,598,172
|
)
|
|
|
(6,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Payment on loan payable
|
|
|
(2,195,872
|
)
|
|
|
-
|
|
|
Receivables from related party
|
|
|
(74,857
|
)
|
|
|
-
|
|
|
Proceed from loan payable
|
|
|
-
|
|
|
|
2,162,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,270,729
|
)
|
|
|
2,162,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(13,507
|
)
|
|
|
(165,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and equivalents
|
|
|
(3,317,464
|
)
|
|
|
3,175,328
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents, beginning balance
|
|
|
6,969,454
|
|
|
|
3,794,126
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents, ending balance
|
|
$
|
3,651,990
|
|
|
$
|
6,969,454
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
748,306
|
|
|
$
|
454,670
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
91,260
|
|
|
$
|
38,525
|
|
The accompanying notes are an integral part of these consolidated financial statements
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2009 (RESTATED) AND 2008
|
|
Common Stock
|
Preferred Stock
|
Additional Paid
|
|
|
|
Statutory
|
|
(Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
Shares
|
|
|
Amount
|
in Capital
|
|
Income
|
|
Reserve
|
|
Deficit)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to statutory reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 (Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
(
FORMERLY, CHINA DIGITAL COMMUNICATION GROUP AND SUBSIDIARIES
)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
Note 1 – ORGANIZATION
New Energy Systems Group (“New Energy” or the “Company”, FKA: China Digital Communication Group) was incorporated under the laws of the State of Nevada on March 27, 2001, operating its business through its wholly owned subsidiary E'Jenie Technology Development Co., Ltd (“E’Jenie”), a company incorporated under the laws of the Peoples Republic of China (“PRC”). Through E'Jenie, the Company manufactures and distributes lithium battery shells and related products primarily in China. When used in these notes, the terms “Company,” “we,” “our,” or “us” mean New Energy Systems Group and its Subsidiaries.
On September 30, 2004, the Company entered into an Exchange Agreement with Billion Electronics Co., Ltd (“Billion”). Billion owns all of the issued and outstanding shares of E’Jenie. Billion was incorporated under the laws of the British Virgin Islands (“BVI”) on July 27, 2004. Pursuant to the Exchange Agreement, the Company purchased all of the issued and outstanding shares of Billion for approximately $1,500,000 in cash and 4,566,210 shares of the Company’s common stock, or approximately 8.7% of then issued and outstanding shares.
On June 28, 2006, the Company finalized an Exchange Agreement with Galaxy View International Ltd (“Galaxy View”), and the shareholders of Galaxy View. Galaxy View owned all of the issued and outstanding shares of Sono. Pursuant to the Exchange Agreement, the Company acquired 100% of Galaxy View in a cash and stock transaction valued at $6,787,879. Under the terms of the Agreement, the Company paid the Shareholders $3,000,000 in cash and delivered 7,575,757 unregistered shares of the Company’s preferred stock valued at $3,787,879.
On April 24, 2007, the Company entered into an Agreement to transfer of shares of Sono Digital Electronics Technologies Co., Ltd (“Sono”) with Liu Changqing and Wang Feng (collectively, the “Purchasers”) for the sale of its wholly-owned subsidiary Sono. Changqing purchased 60% and Feng purchased 40% in Sono. In exchange for all of the outstanding shares of Sono, the Purchasers paid $3,000,000 for the acquisition. The Company disposed Galaxy View and its wholly-owned subsidiary Sono, on April 24, 2007.
In connection with the acquisition of Galaxy View, the Company issued Series A Preferred Stock to the selling shareholders. On June 29, 2006, the Company filed with the Secretary of State of the State of Nevada a Certificate of Designation of Series A Convertible Preferred Stock designating 7,575,757 of the Company’s previously authorized preferred stock. Each share of Series A Preferred Stock entitles the holder to seven votes per share on all matters to be voted on by the shareholders of the Company and is mandatorily convertible into one tenth of one share of the Company’s common stock on June 29, 2011 (after providing for the July 13, 2009, 10-to-1 reverse stock split of the Company’s common stock). Each share of Series A Preferred Stock shall, with respect to rights on liquidation, dissolution or winding up, ranks (i) on a parity with the Company’s common stock, and (ii) junior to any other class of the Company’s preferred stock. Series A Preferred Stockis not entitled to any preferred dividend. However, the preferred shareholders will share the dividend on common stock proportionately if and when the dividend on Common Stock is declared.
On July 13, 2009, the Company effected a 10-to-1 reverse stock split. The principal effect of the Reverse Split was (i) that the number of shares of Common Stock issued and outstanding was reduced from 54,460,626 to approximately 5,446,062 (depending on the number of fractional shares that are issued or cancelled), and (ii) that each share of Series A Preferred Stock is convertible into one tenth of one share of the Company’s common stock. The number of authorized shares of Common Stock was not affected. All per share data was retroactively restated.
On September 8, 2009, the Company amended the Company’s Articles of Incorporation to change the Company’s name to “New Energy Systems Group.”
On December 7, 2009, the Company closed the transactions contemplated by the share exchange agreement dated November 19, 2009 with Anytone International (H.K.) Co., Ltd. (“Anytone International”) and Shenzhen Anytone Technology Co., Ltd. (“Shenzhen Anytone”). Shenzhen Anytone is a subsidiary of Anytone International, collectively referred to as “Anytone”. Pursuant to the Share Exchange Agreement, the Company issued the shareholders of Anytone International 3,593,939 shares of the Company's Common Stock with a restrictive legend, and agreed to pay US $10,000,000. As of December 31, 2009 $5,000,000.00 has been paid; the remaining $5,000,000 will be paid on or before June 30, 2010 with no interest. The acquisition was completed on December 7, 2009.
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements were prepared in conformity with United States Generally Accepted Accounting Principles (US GAAP). The Company’s functional currency is the Chinese Yuan Renminbi (CNY); however the accompanying consolidated financial statements were translated and presented in United States Dollars ($).
Exchange Gain (Loss)
During the years ended December 31, 2009 and 2008, the transactions of E’Jenie and Anytone were denominated in foreign currency and were recorded in CNY at the rates of exchange in effect when the transactions occurred . Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled.
Foreign Currency Translation and Comprehensive Income (Loss)
During the years ended December 31, 2009 and 2008, the accounts of E’Jenie and Anytone were maintained, and its financial statements were expressed, in CNY. Such financial statements were translated into $ in accordance with Statement of Financial Accounts Standards (“SFAS”) No. 52, “Foreign Currency Translation,” (codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830) with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the current exchange rate, stockholder’s equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income” as a component of shareholders’ equity (codified in FASB ASC Topic 220). There were no significant fluctuations in the exchange rate for the conversion of CNY to USD after the balance sheet date.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include collectability of accounts receivable, accounts payable, sales returns and recoverability of long-term assets.
Principles of Consolidation
The consolidated financial statements include the accounts of New Energy Systems Group and its wholly owned subsidiaries Billion, E’Jenie, and Anytone, are collectively referred to the Company. All material intercompany accounts, transactions and profits were eliminated in consolidation.
Revenue Recognition
The Company manufactures and distributes battery shells and covers for cellular phones. The Company established a new division in 2008, through which the Company began selling batteries in PRC. The Company's revenue recognition policies are in compliance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 104 (codified in FASB ASC Topic 480). Sales revenue is recognized when the significant risks and rewards of the ownership of goods have been transferred to the buyers. No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due, the possible return of goods, or when the amount of revenue and the costs incurred or to be incurred in respect of the transaction cannot be measured reliably.
Sales revenue represents the invoiced value of goods, net of value-added tax (“VAT”). All of the Company’s products sold in the PRC are subject to Chinese value-added tax of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123” (codified in FASB ASC Topic 718). The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
Income Taxes
The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” (codified in FASB ASC Topic 740), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that were included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (codified in FASB ASC Topic 740) on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48. As a result of the implementation of Interpretation 48, the Company recognized no material adjustments to liabilities or stockholders’ equity. When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.
At December 31, 2009 and 2008, the Company had not taken any significant uncertain tax position on its tax return for 2008 and prior years or in computing its tax provision for 2009.
Statement of Cash Flows
In accordance with SFAS No. 95, “Statement of Cash Flows” (codified in FASB ASC Topic 230), cash flows from the Company’s operations are based upon local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Supplemental Cash Flow Disclosures
Cash from operating, investing and financing activities
from changes in assets and liabilities, was net
of the acquisition of Anytone (See Note 15).
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. At December 31, 2009 and 2008, the Company had approximately $3,644,000 and $6,969,000 cash in state-owned banks, respectively, of which no deposits were covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
Allowance for Doubtful Accounts
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. The allowance for doubtful accounts was $0 at December 31, 2009 and 2008.
Inventory
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowance is made to write down inventories to market value, if lower. As of December 31, 2009 and 2008, inventory consisted of raw materials, work in progress and finished goods as follows:
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2009
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2008
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Less: reserve for impairment of inventory
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Property, Plant & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
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Computer Hardware and Software
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As of December 31, 2009 and 2008, Property, Plant & Equipment consisted of the following:
Depreciation was approximately $193,000 and $225,349 for the years ended December 31, 2009 and 2008, respectively.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
Level 1 inputs to the valuation methodology are quoted prices 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 asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.
As of December 31, 2009 and 2008, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.
Basic and Diluted Earnings per Share (EPS)
Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all the potential common shares, warrants and stock options had been issued and if the additional common shares were dilutive. Diluted net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of the Company’s acquisitions of interests in its subsidiaries. Under SFAS No. 142, “Goodwill and Other Intangible Assets (“SFAS 142”) (codified in FASB ASC Topic 350), goodwill is no longer amortized, but tested for impairment upon first adoption and annually, thereafter, or more frequently if events or changes in circumstances indicate that it might be impaired.
Intangible Assets
The Company applies criteria specified in SFAS No. 141(R), “Business Combinations” (codified in FASB ASC Topic 805) to determine whether an intangible asset should be recognized separately from goodwill. Intangible assets acquired through business acquisitions are recognized as assets separate from goodwill if they satisfy either the “contractual-legal” or “separability” criterion. Per SFAS 142, (codified in FASB ASC Topic 350), intangible assets with definite lives are amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (codified in FASB ASC Topic 360). Intangible assets, such as purchased technology, trademark, customer list, user base and non-compete agreements, arising from the acquisitions of subsidiaries and variable interest entities are recognized and measured at fair value upon acquisition. Intangible assets are amortized over their estimated useful lives from one to ten years. The Company reviews the amortization methods and estimated useful lives of intangible assets at least annually or when events or changes in circumstances indicate that assets may be impaired. The recoverability of an intangible asset to be held and used is evaluated by comparing the carrying amount of the intangible to its future net undiscounted cash flows. If the intangible is considered impaired, the impairment loss is measured as the amount by which the carrying amount of the intangible exceeds the fair value of the intangible, calculated using a discounted future cash flow analysis. The Company uses estimates and judgments in its impairment tests, and if different estimates or judgments had been utilized, the timing or the amount of the impairment charges could be different.
Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, (codified in FASB ASC Topic 360) which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business (codified in FASB ASC Topic 225).” The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144 (codified in FASB ASC Topic 360). SFAS 144 (codified in FASB ASC Topic 360) requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market
values are reduced for the cost of disposal.
Recent accounting pronouncements
In October 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In August 2009, the FASB issued an ASU regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
On July 1, 2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168 , “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB Accounting Standards Codification™ (“Codification”) and, for SEC registrants, guidance issued by the SEC. The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC. The Codification is amended to effect non-SEC changes to authoritative GAAP. Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to the Consolidated Financial Statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), codified as FASB ASC Topic 810-10, which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption of SFAS 167 will have an impact on its financial condition, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB Topic ASC 860, which requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption of SFAS 166 will have an impact on its financial condition, results of operations or cash flows.
In April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic 825-10-50. This FSP 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 FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. These additional disclosures are required beginning with the quarter ending June 30, 2009. This FSP had no material impact on the Company’s financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB ASC Topic 320-10. This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulate other comprehensive income. The Company adopted FSP No. SFAS 115-2 and SFAS 124-2 beginning April 1, 2009. This FSP had no material impact on the Company’s financial position, results of operations or cash flows.
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FSP No. SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and 820-10-50-2, provides additional guidance for estimating fair value and emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. The Company adopted FSP No. SFAS 157-4 April 1, 2009. This FSP had no material impact on the Company’s financial position, results of operations or cash flows.
Note 3 – INTANGIBLE ASSETS
As of December 31, 2009 and 2008 intangible assets consisted of the following:
During the year ended December 31, 2006, E’Jenie purchased the two facilities it previously leased. The cost of the acquisition was $1,103,596. Of that amount $551,798 was recorded as an intangible asset as land rights. Because the laws of the PRC do not allow ownership of land, the Company received a Certificate of Real Estate from the Ministry of Land and Resources to use the land. E’Jenie incurred losses and also its revenue reduced significantly during the year ended December 31, 2007. The Company performed intangible assets impairment test and concluded there was impairment as to the carrying value of intangible assets of E’Jenie of $1,972,598 as of December 31, 2007.
The intangible assets are amortized over 10-30 years. Amortization was approximately $275,000 and $83,437 for the years ended December 31, 2009 and 2008, respectively.
Amortization expenses for the Company’s intangible assets over the next five fiscal years from December 31, 2009 are estimated to be:
Note 4 – TAXES PAYABLE
As of December 31, 2009 and 2008, tax payable comprised the following:
Note 5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of December 31, 2009 and 2008, accounts payable and accrued expenses comprised of the following:
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2009
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2008
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Payable of purchase consideration of Anytone
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Payable for expense reimbursement
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Professional fees payable
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Note 6 - LOAN PAYABLE
On August 25, 2008, the Company entered a bank loan agreement of RMB 15,000,000 or $2,200,500. The loan was unsecured, with floating rate interest-bearing ranging from 6.66% to 7.47%, and was due August 24, 2009. The Company repaid the loan on the due date.
Note 7 – RELATED PARTY TRANSACTIONS
As of December 31, 2008, the Company had an unsecured, due on demand, and non interest-bearing loan from a shareholder of $174,600 which was repaid by the end of 2009. As of December 31, 2009, the Company had $527,225 unsecured, due on demand and non interest-bearing loan payable to the original owner of Shenzhen Anytone for the acquisition of Shenzhen Anytone by Anytone International.
Note 8 – DEFFERD TAX LIABILITY
Deferred tax represented differences between the tax bases and book bases of intangible assets. At December 31, 2009, deferred tax liability represents the difference between the fair value and the tax basis of patents acquired in the acquisition of Anytone (See Note 16).
Note 9 – STOCK OPTIONS
On November 4, 2005, the Company issued a nonqualified stock option for 10,000 shares (post-reverse stock split) to a member of the board with an exercise price of $0.53 that will expire on November 3, 2010. The option vested and became exercisable immediately.
The Company's 2005 Stock Option Incentive Plan provides for the grant of 10,000 option rights (post-reverse stock split) to a non-employee director. The Plan is administered by the Company's Compensation Committee, who has the authority to select plan participants and determine the terms and conditions of such awards.
The Company adopted SFAS 123(R) (codified in FASB ASC Topic 718) on November 1, 2005 using the modified prospective method. Prior to the adoption of SFAS 123(R) the Company did not have any stock options.
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4.00
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%
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Expected life of the options
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58.0
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%
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0
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%
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On March 20, 2006, the Company issued a non-incentive stock option for 150,000 shares (pre-reverse stock split) to a consultant with an exercise price of $0.702 that expired on March 19, 2009. The options vested and became exercisable on May 1, 2006.
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4.77
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%
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Expected life of the options
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126.76
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%
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0
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%
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The outstanding options (post-reverse stock split) as of December 31, 2009 and 2008 listed as follow:
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Number of Shares
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Outstanding at January 01, 2008
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Outstanding at December 31, 2008
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Outstanding at December 31, 2009
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Exercisable at December 31, 2009
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Options outstanding (post-reverse stock split) at December 31, 2009 and related weighted average price and intrinsic value are as follows:
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Exercise
Prices
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Total
Options
Outstanding
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Weighted
Average
Remaining
Life
(Years)
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Total
Weighted
Average
Exercise
Price
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Options
Exercisable
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Weighted
Average
Exercise
Price
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Aggregate
Intrinsic
Value
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[Missing Graphic Reference]
Note 10 – COMMON STOCK AND NON-CASH STOCK COMPENSATION
On August 18, 2009, the Company entered into a four year consulting agreement for promoting the Company's image. In connection with this agreement, the Company was required to issue 1,930,000 shares of Common Stock valued at $2.70 (stock price at grant date) to these eight consultants. During the year ended December 31, 2009, the Company issued 1,000,000 shares of the Company’s stock and recorded $2,700,000 as deferred compensation. The Company amortized $251,507 as stock-based compensation. According to ASC 505-50-25-6, a grantor shall recognize the goods acquired or services received in a share-based payment transaction when it obtains the goods or as services received. A grantor may need to recognize an asset before it actually receives goods or services if it first exchanges share-based payment for an enforceable right to receive those goods or services; therefore, the Company recorded unamortized portion of deferred compensation as an asset, of which, $675,000 was current, and $1,773,493 was noncurrent.
On December 3, 2009, the Company issued 3,593,939 shares of common stock, valued at $6.6 per share which was the stock price at the acquisition date, to pay the stock portion of the purchase consideration for the acquisition of Anytone. The common stock total valued at $23,719,997 at the acquisition date (see note 15).
On December 30, 2009, the Company issued 1,823,346 shares of common stock valued at $8.51 per share which was the stock price at the acquisition date, to pay the stock portion of the total purchase consideration for the acquisition of Shenzhen NewPower Technology Co., Ltd. ("NewPower”) (see note 16).
Note 11 – INCOME TAXES
As of December 31, 2009, the Company in the US had approximately $1,138,000 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward 20 years. The deferred tax assets for the US entities at December 31, 2009 consists mainly of net operating loss carry forwards and were fully reserved as the management believes it is more likely than not that these assets will not be realized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at the location as of December 31, 2009. Accordingly, the Company has no net deferred tax assets.
There is no income tax for companies domiciled in the BVI. Accordingly, the Company's consolidated financial statements do not present any income tax provisions related to BVI tax jurisdiction where Billion is domiciled.
Pursuant to the PRC Income Tax Laws, the Company's subsidiary in China is generally subject to Enterprise Income Taxes ("EIT") at a statutory rate of 25%. The subsidiary is qualified as a new technology enterprises and under PRC Income Tax Laws, it subject to a preferential tax rate of 18%.
Beginning January 1, 2008, the new PRC Enterprise Income Tax ("EIT") law replaced the existing laws for Domestic Enterprises ("DES") and Foreign Invested Enterprises ("FIEs"). The new standard EIT rate is 25%.
Subsidiary E’Jenie was qualified as new technology enterprise under PRC Income Tax Law and still subject to the tax holiday with applicable EIT of 10% for 2009 and 9% for 2008, respectively. The new acquired subsidiary Anytone’s effective EIT for 2009 was 20%.
Foreign pretax earnings approximated $7,400,000 and $5,300,000 for the years ended December 31, 2009 and 2008 respectively. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent those earnings are indefinitely invested outside the United States. At December 31, 2009, $16,900,000 of accumulated undistributed earnings of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of $4,607,000 would have to be provided if such earnings were remitted currently.
The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations for the years ended December 31, 2009 and 2008, respectively:
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2009
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2008
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State tax expense net of federal tax
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Valuation allowance on deferred tax on US NOL
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Tax expense at actual rate
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The provisions for income tax expenses for the years ended December 31, 2009 and 2008 consisted of the following:
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2009
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2008
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Income tax expenses – current
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Income tax benefit – deferred
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Total income tax expenses
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Note 12 – STATUTORY RESERVE
As stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
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i)
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Making up cumulative prior years' losses, if any;
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ii)
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Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;
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iii)
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Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and statutory common welfare fund is no longer required per the new cooperation law executed in 2006.
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iv)
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Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.
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The Company reserved $760,878 for the year ended December 31, 2009 and $487,596 for the year ended December 31, 2008.
NOTE 13 - MAJOR CUSTOMERS AND VENDORS
The Company purchased its products from three vendors during the year ended December 31, 2009 with each vendor individually accounting for 24%, 23% and 19% of total purchases. Accounts payable to these vendors were $648,017, $340,848 and $217,116 as of December 31, 2009. The Company purchased its battery products from three vendors during the year ended December 31, 2008 with each vendor individually accounting for about 36%, 34% and 30% of purchases. Accounts payable to the venders amounted to RMB 7,497,200 ($1,009,839), RMB 6,081,550 ($892,163) and RMB 5,637,270 ($826,988) as of December 31, 2008.
The Company purchased its raw materials for battery shell business from three vendors, who purchased more than 10% of the raw material for battery shell, during the year ended December 31, 2008, with each vendor individually accounting for about 51%, 26% and 17%. Accounts payable to the venders amounted to RMB 832,570 ($122,138), RMB 308,000 ($45,184) and RMB 136,800 ($20,069), respectively, as of December 31, 2008.
Two customers accounted for 49% and 15% of the total sales during the year ended December 31, 2009. Accounts receivable from these customers were $4,229,689 and $866,060 as of December 31, 2009. One major customer accounted 100% of the battery sales during the year ended December 31, 2008. Accounts receivable from the customer amounted to RMB 48,124,656 ($7,059,887) as of December 31, 2008.
The Company had four customers accounted over 10% of the battery shell sales during the year ended December 31, 2008 with each customer individually accounting for about 19%, 17%, 14% and 10%. Accounts receivable from the customer amount to RMB 381,132 ($55,912), RMB 456,166 ($66,919). RMB 173,304 ($25,424) and RMB 154,682 ($22,692).
Note 14 – SEGMENT REPORTING
The Company had two principal operating segments which were: battery components manufacture and battery assembly and distribution. These operating segments were determined based on the nature of the products offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company's chief executive officer and chief financial officer have been identified as the chief operating decision makers. The Company’s chief operating decision makers direct the allocation of resources to operating segments based on the profitability, cash flows, and other measurement factors of each respective segment.
The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The segments’ accounting policies are the same as those described in the summary of significant accounting policies. The following table shows the operations of the Company's reportable segments:
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2009
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2008
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Revenues from unaffiliated customers:
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Net income (loss) before taxes:
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Depreciation and amortization:
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Note 15- ACQUISITION OF ANYTONE AND UNAUDITED PRO FORMA INFORMATION
On November 19, 2009, the Company entered into a share exchange agreement with Anytone International and Shenzhen Anytone. Shenzhen Anytone is a subsidiary of Anytone International, collectively referred as Anytone. Pursuant to the Share Exchange Agreement, the Company issued the shareholders of Anytone International 3,593,939 shares of the Company's Common Stock with a restrictive legend, and agreed to pay $10,000,000. As of December 31, 2009, $5,000,000 has been paid; the remaining $5,000,000 will be paid on or before June 30, 2010 with no interest. The acquisition was completed December 7, 2009.
The purchase price for Anytone was $10,000,000 cash and 3,593,939 shares of common stock equivalent to approximately $23,719,997 , which was determined by multiplying the 3,593,939 shares by the stock price of New Energy at the acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition. The fair values of the assets acquired and liabilities assumed at agreement date are used for the purpose of purchase price allocation. The excess of the purchase price over the fair value of the net assets acquired of $19,775,939 is recorded as goodwill.
The Company expects synergy from combining the operations. Revenue and net income of Anytone included in the consolidated income statement for the year ended December 31, 2009 was $3,424,291 and $561,309.
The following unaudited pro forma consolidated results of operations for New Energy and Anytone for the years ended December 31, 2009 and 2008 presents the operations of New Energy and Anytone as if the acquisitions occurred on January 1, 2009 and 2008, respectively. The pro forma results are not necessarily indicative of the actual results that would have occurred had the acquisitions been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.
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2009
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2008
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Total non-operating expense
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Weighted average shares outstanding
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Note 16- SUBSEQUENT EVENT
On January 12, 2010 the Company closed the share exchange agreement entered on December 11, 2009 with Shenzhen NewPower Technology Co., Ltd. ("NewPower"), whereby NewPower would merge with and into the Company's wholly owned subsidiary Shenzhen E'Jenie. Pursuant to the Share Exchange Agreement, in exchange for all of the capital stock of NewPower, the Company issued to the shareholders of NewPower 1,823,346 shares of the Company's Common Stock with a restrictive legend, and agreed to pay cash of US $3,000,000. The acquisition was completed January 12, 2010. The following unaudited pro forma consolidated results of operations for the Company and NewPower for the years ended December 31, 2009 and 2008 presents the Company and NewPower’s operations as if the acquisitions occurred on January 1, 2009 and 2008, respectively. The pro forma results are not necessarily indicative of the actual results that would have occurred had the acquisitions been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.
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For the years ended
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December 31, 2009
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December 31, 2008
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(
Unaudited)
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(In thousands)
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The condensed unaudited balance sheet discloses the amount assigned to each major asset and liability caption of the acquired entity (NewPower) at acquisition date was as follows (in thousands):
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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PROPERTY AND EQUIPMENT, NET
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Total Current Liabilities
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The following unaudited pro forma consolidated results of operations for the Company, Anytone and NewPower for the years ended December 31, 2009 and 2008 presents the Company, Anytone and NewPower’s operations as if the acquisitions for both Anytone and NewPower occurred on January 1, 2009 and 2008, respectively. The pro forma results are not necessarily indicative of the actual results that would have occurred had the acquisitions been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.
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For the years ended
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December 31, 2009
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December 31, 2008
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(Unaudited)
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(In thousands)
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Note 17- RESTATEMENT OF FINANCIAL STATEMENTS
The financial statements at December 31, 2009 were restated to reflect the following:
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1.
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The Company initially valued the stock components of the acquisition price of Anytone based on the average stock price of New Energy two days before and two days after the agreement date. The Company revised the stock price used to value the stock components of the acquisitions based on the guidance at FASB ASC 805-30-30-7 that is the stock price of New Energy at the acquisition date. Accordingly, the goodwill amount was changed as a result of revised acquisition price by using the stock price at the acquisition date.
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2.
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As a result of the change of goodwill, the additional paid-in capital changed accordingly.
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3.
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The Company initially presented equity-based compensation for stock issued to consultants for services not yet provided as a contra account in equity. The Company now recorded such prepaid compensation as an asset in the balance sheet according to FASB ASC 505-50.
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The above restatement did not have any impact on the statement of income and other comprehensive income and cash flows.
The following table presents the effects of the restatement adjustment on the accompanying consolidated balance sheet at December 31, 2009:
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Consolidated Balance Sheet at December 31, 2009
|
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As
Previously
Reported
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Restated
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Net
Adjustment
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Deferred compensation-noncurrent
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Additional paid in capital
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Less: Deferred compensation
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Total stockholders’ equity
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F - 23
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