XASE:NEWN Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XASE:NEWN (): Fair Value Estimate
Premium
XASE:NEWN (): Consider Buying
Premium
XASE:NEWN (): Consider Selling
Premium
XASE:NEWN (): Fair Value Uncertainty
Premium
XASE:NEWN (): Economic Moat
Premium
XASE:NEWN (): Stewardship
Premium
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission file number: 000-52763

NEW ENERGY SYSTEMS GROUP
(Exact name of small business issuer as specified in its charter)
 
Nevada
 
91-2132336
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
identification No.)
 
5th Floor, 51st Building, No. 5, Qiongyu Rd., Hightech Industrial Park, Nanshan District,
Shenzhen City, China 518057
(Address of principal executive offices)
 
(917) 573-0302
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o
       
Non-accelerated filer o     (Do not check if a smaller reporting company)   Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No þ
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes □  No □



 
 

 
APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 14,551,731 shares of common stock, $.001 par value, were outstanding as of August 13, 2012.
 
 
 
 
 
 
2

 
 
TABLE OF CONTENTS

 
 
 
Page
 
 
PART I
 
 
 
         
Item 1.
Financial Statements
    4  
           
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    27  
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    35  
           
Item 4.
Controls and Procedures
    35  
           
 
PART II
       
           
Item 1.
Legal Proceedings
    36  
           
Item 1A.
Risk Factors
    36  
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    36  
           
Item 3.
Defaults Upon Senior Securities
    36  
           
Item 4.
Mine Safety Disclosures
    36  
           
Item 5.
Other Information
    36  
           
Item 6.
Exhibits
    37  
           
 SIGNATURES
    41  
         

 
3

 

PART I – FINANCIAL INFORMATION
 
ITEM 1.     FINANCIAL STATEMENTS
 
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
June 30, 2012 (Unaudited)
   
December 31,
2011
 
Current assets
           
Cash and equivalents
  $ 9,033,416     $ 4,528,731  
Accounts receivable
    4,189,080       6,614,814  
Inventory
    749,766       1,661,515  
Prepayments
    116,687       554,375  
Other receivables
    8,763,242       13,550,209  
Taxes receivable
    236,070       217,106  
Due from shareholders
    283,259       284,337  
Deferred compensation
    696,475       686,979  
                 
        Total current assets
    24,067,995       28,098,066  
                 
Noncurrent assets
               
Property and equipment
    374,306       208,271  
Deferred compensation - noncurrent
    85,993       423,493  
Goodwill
    37,180,588       39,888,807  
Intangible assets, net
    4,303,504       11,051,910  
                 
        Total noncurrent assets
    41,944,391       51,572,481  
                 
Total assets
  $ 66,012,386     $ 79,670,547  
                 
Current liabilities
               
Accounts payable
  $ 833,868     $ 2,837,889  
Accrued expenses and other payables
    928,371       818,452  
Taxes payable
    58,758       21,103  
                 
Total current liabilities
    1,820,997       3,677,444  
                 
Deferred tax liability
    2,505,439       2,764,571  
                 
Total Liabilities
    4,326,436       6,442,015  
                 
Commitments and Contingencies
               
                 
Stockholders' equity
               
Preferred stock, $.001 par value, 60,000,000 shares authorized, 0 shares issued and outstanding
    -       -  
Common stock, $.001 par value, 140,000,000 shares authorized, 14,591,731 and 14,571,731 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
    14,591       14,571  
Additional paid in capital
    74,298,859       74,255,585  
Statutory reserves
    2,410,573       2,410,573  
Other comprehensive income
    3,255,068       3,292,074  
Accumulated deficit
    (18,293,141 )     (6,744,271 )
                 
Total stockholders' equity
    61,685,950       73,228,532  
                 
Total liabilities and stockholders' equity
  $ 66,012,386     $ 79,670,547  

 
4

 
 
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 
   
Six Months Ended June 30,
    Three Months Ended June 30,  
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
    (Unaudited)  
NET SALES
                       
Battery
  $ 4,988,308     $ 11,953,882     $ 1,991,447     $ 4,984,984  
Solar panel
    3,557,301       11,675,972       1,598,897       6,161,054  
  Total revenue
    8,545,609       23,629,854       3,590,344       11,146,038  
                                 
COST OF SALES
                               
Battery
    4,639,514       5,745,805       1,763,945       2,466,610  
Solar panel
    3,390,119       8,553,509       1,527,426       4,676,631  
  Total cost of sales
    8,029,633       14,299,314       3,291,371       7,143,241  
                                 
GROSS PROFIT
    515,976       9,330,540       298,973       4,002,797  
                                 
OPERATING EXPENSE
                               
Selling
    718,733       597,973       323,378       276,110  
General and administrative
    3,242,307       2,656,014       1,576,709       1,273,582  
Impairment of goodwill and intangible assets
    8,420,096       -       8,420,096       -  
  Total operating expenses
    12,381,136       3,253,987       10,320,183       1,549,692  
                                 
INCOME (LOSS) FROM OPERATIONS
    (11,865,160 )     6,076,553       (10,021,210 )     2,453,105  
                                 
OTHER INCOME (EXPENSES)
                               
Other expense (income)
    (606 )     2,324       (347 )     (290 )
Interest income
    17,283       4,463       10,105       3,188  
  Total other income, net
    16,677       6,787       9,758       2,898  
                                 
INCOME (LOSS) BEFORE INCOME TAXES
    (11,848,483 )     6,083,340       (10,011,452 )     2,456,003  
                                 
INCOME TAX BENEFIT (EXPENSE)
    299,613       (1,656,055 )     114,884       (668,954 )
                                 
INCOME (LOSS) FROM CONTINUED OPERATIONS
    (11,548,870 )     4,427,285       (9,896,568 )     1,787,049  
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
    -       4,180,143       -       1,359,824  
                                 
NET INCOME (LOSS)
    (11,548,870 )     8,607,428       (9,896,568 )     3,146,873  
                                 
OTHER COMPREHENSIVE INCOME (LOSS)
                               
     Foreign currency translation
    (37,006 )     361,391       (46,839 )     246,540  
                                 
COMPREHENSIVE INCOME (LOSS)
  $ (11,585,876 )   $ 8,968,819     $ (9,943,407 )   $ 3,393,413  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
                               
Basic
    14,573,599       14,294,318       14,575,467       14,302,039  
Diluted
    14,574,316       14,564,800       14,576,900       14,551,731  
                                 
NET INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS
                               
Basic
  $ (0.79 )   $ 0.31     $ (0.68 )   $ 0.12  
Diluted
  $ (0.79 )   $ 0.30     $ (0.68 )   $ 0.12  
                                 
NET INCOME (LOSS) PER SHARE FROM DISCONTINUING OPERATIONS
                         
Basic
  $ -     $ 0.29     $ -     $ 0.10  
Diluted
  $ -     $ 0.29     $ -     $ 0.09  
                                 
NET INCOME (LOSS) PER SHARE
                               
Basic
  $ (0.79 )   $ 0.60     $ (0.68 )   $ 0.22  
Diluted
  $ (0.79 )   $ 0.59     $ (0.68 )   $ 0.21  
 
 
5

 
 
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ (11,548,870 )   $ 8,607,428  
Adjustments to reconcile net income (loss) to net cash
               
provided by operating activities:
               
   Depreciation and amortization
    1,059,493       1,544,712  
   Changes in deferred taxes
    (259,132 )     (337,440 )
   Deferred stock compensation
    345,404       337,500  
   Stock options and warrant expense
    25,894       20,038  
   Impairment of goodwill and intangible assets
    8,420,096       -  
(Increase) / decrease in current assets:
               
   Accounts receivable
    2,556,709       1,189,052  
   Inventory
    907,956       (1,567,548 )
   Prepaid expenses, deposits and other receivables
    436,984       (549,571 )
Increase/(decrease) in current liabilities:
               
   Accounts payable
    (2,148,198 )     (2,494,328 )
   Accrued expenses and other payables
    110,571       (233,546 )
   Taxes payable
    17,998       45,187  
                 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (75,095 )     6,561,484  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
   Cash from sale of disposed subsidiaries
    4,799,936       -  
   Acquisition of property and equipment
    (190,253 )     (12,964 )
                 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    4,609,683       (12,964 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
   Repayment of acquisition liability for subsidiaries
    -       (6,757,273 )
   Cash from warrant exercise
    -       87,500  
                 
NET CASH USED IN FINANCING ACTIVITIES
    -       (6,669,773 )
                 
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND EQUIVALENTS
    (29,903 )     302,182  
                 
NET INCREASE IN CASH AND EQUIVALENTS
    4,504,685       180,929  
                 
CASH AND EQUIVALENTS, BEGINNING OF PERIOD
    4,528,731       13,065,008  
                 
CASH AND EQUIVALENTS, END OF PERIOD
  $ 9,033,416     $ 13,245,937  
                 
SUPPLEMENTAL DISCLOSURES:
               
Cash paid during the period for:
               
     Income taxes
  $ -     $ 3,464,408  
     Interest
  $ -     $ -  
 
 
6

 
 
NEW ENERGY SYSTEMS GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011

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, operates its business through its wholly owned subsidiaries E'Jenie Technology Development Co., Ltd ("E'Jenie"), Shenzhen Anytone Technology Co., Ltd. ("Shenzhen Anytone"), Shenzhen NewPower Technology Development Co., Ltd. ("NewPower"), Shenzhen Kim Fai Solar Energy Technology Co., Ltd. ("Kim Fai"), companies incorporated under the laws of the People's Republic of China ("PRC" of “China”). Through our subsidiaries, the Company manufactures and distributes lithium battery, battery shells and related application 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 owned 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 shares of Billion for $1,500,000 and 4,566,210 shares of the Company’s common stock, or 8.7% of then issued and outstanding shares. 
 
On October 20, 2010, the Company filed an Amendment to its Certification of Designations, Preferences and Rights for its Series A Convertible Preferred Stock. As a result of the Amendment, the Series A were convertible at the option of the holder until June 29, 2011, when every 10 issued and outstanding shares of Series A were automatically convertible into one share of common stock (on a post-split basis). Additionally, the Series A were be subject to a lock-up provision through June 29, 2011, provided, however, that the common stock issuable upon the optional conversion of the Series A shall not be subject to such lock-up limitations. In 2011, 5,022,727 shares Series A preferred stock were converted to 502,273 shares of common stock, and there were 2,553,030 shares of Series A preferred stock outstanding, however, all the outstanding Series A preferred stock was automatically converted.
 
On December 7, 2009, the Company closed the transactions contemplated by the share exchange agreement dated November 19, 2009 with Anytone International (HK) Co., Ltd. (“Anytone International”) and 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 $10,000,000. The acquisition was completed December 7, 2009.  Anytone is engaged in manufacturing and distribution of lithium batteries.
 
On January 12, 2010, the Company closed the transactions contemplated by the share exchange agreement dated December 11, 2009 with NewPower. Pursuant to the share exchange agreement, the Company’s subsidiary E’jenie acquired NewPower. The Company issued the shareholders of NewPower, 1,823,346 shares of Company common stock with a restrictive legend, and $3,000,000. NewPower is engaged in manufacturing and distribution of lithium batteries.

On November 10, 2010, the Company’s subsidiary, Shenzhen Anytone executed a share exchange agreement to acquire all the equity interest of Kim Fai, a Chinese company engaged in the development and sale of solar application products, with the shareholders of Kim Fai. The price for 100% of the outstanding stock of Kim Fai was $13,000,000 in cash and 1,913,265 shares of common stock valued at $14,999,998, which was determined by multiplying the 1,913,265 shares by the stock price of New Energy at the acquisition date. The $13,000,000 was paid in RMB88,400,000 at an exchange rate of 6.8:1 as stated in the agreement; however, based on the exchange rate of 6.645:1 at the acquisition date, RMB88,400,000 was equivalent to $13,303,236 which was the actual cash portion of the purchase consideration that was recorded.
 
 
7

 

On November 24, 2011, the Company entered into an Equity Transfer Agreement (the “Equity Transfer Agreement”) with Xuemei Fang (“Fang”) and Weirong Xu (“Xu”, and together with Fang, the “Buyers”) to transfer 100% of the equity interest of Billion to the Buyers for RMB85,553,892 ($13,578,043). The selling price equaled the appraisal value of Billion, including its wholly owned subsidiaries E’Jenie and NewPower less RMB153,033,107 ($24,287,500) the Company owes E’Jenie, which was cancelled upon completion of the Equity Transfer. Xu is the Director of Marketing of NewPower and Fang is the Vice President of E’Jenie. 20% of the purchase price was paid upon the registration of the Equity Transfer with the relevant PRC authority; thereafter, the Buyers will pay an aggregate of RMB5,800,000 ($920,000) every two months, until the purchase price is paid in full.  As of June 30, 2012, the Company received RMB 30,275,117 ($4,786,655). As of July 31, 2012, the Company received RMB 36,189,824 ($5,721,802) and had an outstanding receivable of RMB 49,364,068 ($7,804,719).

Effective January 13, 2012, Kim Fai’s business including all the assets and liabilities were transferred into Shenzhen Anytone to maximize operational efficiency and save costs.  All of Kimfai’s products will be sold under the “Anytone” brand name.  Kim Fai was owned 100% by Shenzhen Anytone; accordingly, this transfer was recorded at historical cost due to the equity being under common control. Kim Fai will be dissolved after the transfer and is currently in the process of deregistration.

The consolidated interim financial information as of June 30, 2012 and for the six and three month periods ended June 30, 2012 and 2011 was prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) have not been included. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with the SEC.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of June 30, 2012, its consolidated results of operations and cash flows for the six and three month periods ended June 30, 2012 and 2011, as applicable, were made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying consolidated financial statements were prepared in conformity with US GAAP.  The Company’s functional currency is the Chinese Yuan Renminbi (“CNY” or “RMB“); however, the accompanying consolidated financial statements were translated and presented in United States Dollars (“$” or “USD”).
 
Exchange Gain
 
During the six and three months ended June 30, 2012, the transactions of Anytone and Kim Fai, and during the six and three months ended June 30, 2011, the transactions of E’Jenie, Anytone, Kim Fai and NewPower 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 six and three months ended June 30, 2012 and 2011, the accounts of Chinese operating subsidiaries were maintained, and its financial statements were expressed, in CNY. Such financial statements were translated into USD in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, “Foreign Currency Translation,” with the CNY as the functional currency. According to Topic 830, all assets and liabilities were translated at the exchange rate at the balance sheet date, stockholder’s equity was translated at the historical rates and income statement items were translated at the average exchange rate for the period. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, “Reporting Comprehensive Income” as a component of stockholders’ equity. There were no significant fluctuations in the exchange rate for the conversion of CNY to USD after the balance sheet date.
 
 
8

 

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 Anytone and Kim Fai are collectively referred to as the Company.   All material intercompany accounts, transactions and profits were eliminated in consolidation.
 
Reclassifications

Certain prior year amounts were reclassified to conform to the presentation in the current year including the disposal of Billion, E’jenie and NewPower on December 9, 2011. The reclassifications did not have an effect on the results of operations or cash flow.
 
Revenue Recognition
 
The Company manufactures and distributes batteries, battery shells and covers for cellular phones in the PRC. The Company’s revenue recognition policies comply with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. No revenue is recognized if there are significant uncertainties regarding the recovery of the consideration due or the possible return of goods. Payments received before satisfaction of all relevant criteria for revenue recognition are recorded as unearned revenue.
 
Sales revenue is 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 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 FASB ASC Topics 718 and 505, “Share-Based Payment.” The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. Non-employees stock based compensation is accounted for according to ASC 718.
 
Income Taxes
 
The Company utilizes FASB ASC Topic 740, “Accounting for Income Taxes,” 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.
 
 
9

 

The Company follows FASB ASC Topic 740, “Accounting for Uncertainty in Income Taxes.” 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% 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 is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income.

At June 30, 2012 and December 31, 2011, the Company had not taken any significant uncertain tax positions on its tax returns for 2011 or prior years or in computing its tax provision for 2012.

Statement of Cash Flows
 
In accordance with FASB ASC Topic 230, “Statement of Cash Flows”, 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.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts 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 is 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 risks from, among other things, 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 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.
 
 
10

 
 
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 Equivalents
 
Cash and 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 June 30, 2012 and December 31, 2011, the Company had $9,006,500 and $4,307,000 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 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 June 30, 2012 and December 31, 2011.
 
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 June 30, 2012 and December 31, 2011, inventory consisted of the following:

   
2012
   
2011
 
                 
Raw Materials
 
$
452,027
   
$
1,562,024
 
Work-in-process
   
56,844
     
45,323
 
Finished goods
   
240,895
     
54,168
 
   
$
749,766
   
$
1,661,515
 
 
Property and 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:
 
Furniture and Fixtures
5 years
Equipment
5 years
Computer Hardware and Software
5 years
Leasehold Improvement 
 1 year
 
As of June 30, 2012 and December 31, 2011, Property and Equipment consisted of the following:
 
    
2012
   
2011
 
                 
Machinery
 
$
296,862
   
$
297,992
 
Office equipment
   
115,685
     
116,125
 
Leasehold improvement
   
189,726
     
-
 
Subtotal
   
602,273
     
414,117
 
Accumulated depreciation
   
(227,967
)
   
(205,846
)
Plant and Equipment, Net
 
$
374,306
   
$
208,271
 
 
 
11

 
 
Depreciation was $11,458 and $11,018 for the three months ended June 30, 2012 and 2011, Depreciation was $22,964 and $21,937 for the six months ended June 30, 2012 and 2011, respectively.

Fair Value of Financial Instruments
 
For certain of the Company’s financial instruments, including cash and 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 (“FV”) of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV 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 June 30, 2012 and December 31, 2011, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at FV.
 
Basic and Diluted Earnings (loss) 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 EPS is 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 for the outstanding options and the if-converted method for the outstanding convertible preferred shares. Under the treasury stock 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. Under the if-converted method, convertible outstanding instruments are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later). The following tables present a reconciliation of basic and diluted EPS:
 
 
12

 

   
Six Months Ended
June 30,
 
   
2012
   
2011
 
                 
Income (loss) from continuing operations
 
$
(11,548,870)
   
$
4,427,285
 
Income (loss) from discontinued operations
   
-
     
4,180,143
 
Net income (loss)
 
(11,548,870)
   
8,607,428
 
                 
Weighted average shares outstanding - basic
   
14,573,599
     
14,294,318
 
Effect of dilutive securities:
               
Preferred stock
   
-
     
252,482
 
Options issued
   
717
     
-
 
                 
Weighted average shares outstanding – diluted
   
14,574,316
     
14,546,800
 
                 
Income (loss) per share from continuing operations – basic
 
$
(0.79)
   
$
0.31
 
Income (loss) per share from continuing operations – diluted
 
$
(0.79)
   
$
0.30
 
Income (loss) per share from discontinued operations – basic
 
$
--
   
$
0.29
 
Income (loss) per share from discontinued operations – diluted
 
$
--
   
$
0.29
 
Net income (loss) per share – basic
 
$
(0.79)
   
$
0.60
 
Net income (loss) per share – diluted
 
$
(0.79)
   
$
0.59
 

   
Three Months Ended
June 30,
 
   
2012
   
2011
 
                 
Income (loss) from continuing operations
 
$
(9,896,568)
   
$
1,787,049
 
Income (loss) from discontinued operations
   
-
     
1,359,824
 
Net income (loss)
 
(9,896,568)
   
3,146,873
 
                 
Weighted average shares outstanding - basic
   
14,575,467
     
14,302,039
 
                 
Effect of dilutive securities:
               
Preferred stock
   
-
     
249,692
 
                 
Weighted average shares outstanding – diluted
   
14,576,900
     
14,551,731
 
                 
Income (loss) per share from continuing operations – basic
 
$
(0.68)
   
$
0.12
 
Income (loss) per share from continuing operations – diluted
 
$
(0.68)
   
$
0.12
 
Income (loss) per share from discontinued operations – basic
 
$
--
   
$
0.10
 
Income (loss) per share from discontinued operations – diluted
 
$
--
   
$
0.09
 
Net income (loss) per share – basic
 
$
(0.68)
   
$
0.22
 
Net income (loss) per share – diluted
 
$
(0.68)
   
$
0.21
 
 
 
13

 
 
The warrants and options to purchase up to 222,000 shares of common stock were anti-dilutive during the six and three months ended June 30, 2012; 304,500 shares of common stock were anti-dilutive during the six and three months ended June 30, 2011. The Company had 0 dilutive preferred shares during the six and three months ended June 30, 2012; 252,482 and 249,692 dilutive preferred shares during the six and three months ended June 30, 2011, respectively.

Goodwill
 
Goodwill is the excess of the purchase price over the FV of the identifiable assets and liabilities acquired as a result of the Company’s acquisitions of in its subsidiaries. Under FASB ASC Topic 350, “Goodwill and Other Intangible Assets,” 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. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds its FV, with the FV of the reporting unit determined using discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

During the third quarter of 2011, the Company performed annual goodwill impairment assessment for NewPower. During the fourth quarter of 2011, the Company performed annual goodwill impairment assessment for Anytone and Kim Fai.  The goodwill balance prior to the impairment charge was $60,858,842 and was established primarily as a result of acquisitions of NewPower, Anytone and Kim Fai in 2010 and 2011. The Company completed the step one analysis using a combination of market capitalization approach and discounted cash flow. The market capitalization approach uses the Company’s publicly traded stock price to determine FV. The DCF method uses revenue and expense projections and risk-adjusted discount rates. The process of determining FV is subjective and requires management to exercise judgment in determining future growth rates, discount and tax rates and other factors. The current economic environment has impacted the Company’s ability to forecast future demand and has in turn resulted in the use of higher discount rates, reflecting the risk and uncertainty in current markets. The results of the step one analysis indicated potential impairment in NewPower and Anytone reporting units, which were corroborated by a combination of factors including a significant and sustained decline in the market capitalization, which is below the book value, and the deteriorating macro environment, which has resulted in a decline in expected future demand. The Company therefore performed the second step of the goodwill impairment assessment for NewPower and Anytone to quantify the impairment. This involved calculating the implied FV of goodwill, determined in a manner similar to a purchase price allocation, and comparing the residual amount to the carrying amount of goodwill. Based on the analysis incorporating the declining market capitalization in 2011, as well as the significant end market deterioration and economic uncertainties impacting expected future demand including continued slow-down of the battery industry in China, and increased competition resulting from counterfeit products and decreased selling price from other manufacturers.  The Company concluded the entire goodwill balance of NewPower of $14,306,538 and a portion of Anytone’s goodwill of $7,405,344 were impaired and expensed. The goodwill impairment charge is non-cash. The goodwill impairment charge is not deductible for income tax purposes and, therefore, the Company did not record a corresponding tax benefit in 2011.  On December 9, 2011, the Company disposed its subsidiaries Billion, E’jenie and NewPower. As of June 30, 2012, due to continuing losses and decline in market capitalization, the Company conducted impairment test of its goodwill using DCF analysis, performing steps one and two, concluding $2,708,219 of goodwill related to Anytone and Kimfai were impaired.
 
Intangible Assets
 
The Company follows FASB ASC Topic 805, “Business Combinations,” to determine if 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 FASB ASC Topic 350, intangible assets with definite lives are amortized over their estimated useful life and reviewed for impairment in accordance with FASB ASC Topic 360, “Accounting for the Impairment or Disposal of Long-lived Assets.” 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 FV upon acquisition. Intangible assets are amortized over their estimated useful lives from one to 10 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 FV of the intangible, calculated using a DCF 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.
 
 
14

 
 
The Company follows FASB ASC Topic 360 (“ASC 360”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB ASC Topic 225, “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 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 FV of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that FVs are reduced for the cost of disposal. As of June 30, 2012, due to continuing losses, the Company performed impairment test of it is intangible assets, mainly consisting of patents, and concluded $5,711,877 of intangible assets were impaired.
 
Segment reporting

FASB ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
 
The Company had three operating segments: battery components manufacture, battery assembly and distribution, and solar panel manufacture.  The Company disposed of battery components manufacture segment through the disposition of Billion and its subsidiaries. These remaining 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 and chief financial officers were 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.

Recent accounting pronouncements

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.  The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required.  However, if an entity concludes otherwise, it would be required to determine the FV of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. As of June 30, 2012, there is no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements.
 
Note 3 – INTANGIBLE ASSETS
 
As of June 30, 2012 and December 31, 2011, intangible assets consisted of the following:
 
   
2012
   
2011
 
             
Patents
 
15,167,497
   
15,167,497
 
Accumulated amortization
   
(5,152,116
)
   
(4,115,587
)
Less: impairment     (5,711,877 )     -  
Intangible assets, net
 
$
4,303,504
   
$
11,051,910
 
 
The intangible assets are amortized over 10-30 years.  Amortization was $1,036,529 and $999,495 for the six months ended June 30, 2012 and 2011, and for the three months ended June 30, 2012 and 2011 was $518,265 and $502,943, respectively.
 
 
15

 

Amortization for the Company’s intangible assets over the next five fiscal years from June 30, 2012 is estimated to be:
Years ending June 30,
 
2013
 
$
772,625
 
2014
   
772,625
 
2015
   
772,625
 
2016
   
772,625
 
2017
   
772,625
 
Thereafter
   
440,379
 
Total
 
$
4,303,504
 
 
Note 4 - OTHER RECEIVABLES

As of June 30, 2012 and December 31, 2011, other receivables are comprised of the following:
 
   
2012
   
2011
 
             
Receivable for sale of discontinued operations
 
$
8,714,717
   
$
13,501,372
 
Other receivables and deposits
   
48,525
     
48,837
 
Total
 
         8,763,242
   
13,550,209
 
 
As of July 31, 2012, the Company has received $5.72 million from the sale of discontinued operations.

Note 5 – TAXES RECEIVABLE

As of June 30, 2012 and December 31, 2011, taxes receivable are comprised of the following:
 
   
2012
   
2011
 
             
Income tax
 
$
236,070
   
$
196,445
 
VAT
   
-
     
20,661
 
Total
 
$
236,070
   
$
217,106
 

Note 6 – TAXES PAYABLE
 
As of June 30, 2012 and December 31, 2011, taxes payable are comprised of the following:
 
   
2012
   
2011
 
             
VAT
 
34,392
   
-
 
Other
   
24,366
     
21,103
 
Total
 
$
58,758
   
$
21,103
 
 
 
16

 
 
Note 7 –ACCRUED EXPENSES AND OTHER PAYABLES
 
As of June 30, 2012 and December 31, 2011, accrued expenses and other payables are comprised of the following:
 
    
2012
   
2011
 
             
Payable for expense reimbursement
 
$
753,127
   
$
540,653
 
Payroll payables
   
153,497
     
201,484
 
Accrued expenses
   
21,747
     
76,315
 
Total
 
$
928,371
   
$
818,452
 
 
Note 8 – RELATED PARTY TRANSACTIONS
 
Due from Shareholders

As of June 30, 2012 and December 31, 2011, the Company had $283,259 and $284,337 unsecured, due on demand, and non interest bearing advances to the original owners of Anytone International.

Note 9 – DEFERRED TAX LIABILITY
 
Deferred tax is the tax effect of the difference between the tax bases and book bases of intangible assets. At June 30, 2012 and December 31, 2011, deferred tax liability represents the difference between the FV and the tax basis of patents acquired in the acquisition of Anytone.
 
Note 10 – STOCK OPTIONS AND WARRANTS

Options
 
On June 11, 2010, the Company granted options to acquire 25,000 shares of the Company’s common stock, par value $0.001, at $6.55 per share, with a life of three years to an independent director. The options vested in two equal installments, the first being on the date of grant and the second being on the first anniversary of the date of grant. The FV of the options was calculated using the following assumptions: estimated life of three years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. The grant date FV of options was $103,047.

On June 11, 2011, the Company granted options to acquire 25,000 shares of the Company’s common stock, par value $0.001, at $3.13 per share, with a life of three years to the same independent director. The options vested in two equal installments, the first being on the date of grant and the second being on the first anniversary of the date of grant. The FV of the options was calculated using the following assumptions: estimated life of three years, volatility of 100%, risk free interest rate of 0.71%, and dividend yield of 0%. The grant date FV of options was $48,329.
 
 
17

 

On June 11, 2012, the Company granted options to acquire 30,000, 15,000 and 10,000 shares of the Company’s common stock, par value $0.001, at $0.58 per share, with a life of three years to the three independent directors, respectively. The options vested in two equal installments, the first being on the date of grant and the second being on the first anniversary of the date of grant. The FV of the options was calculated using the following assumptions: estimated life of three years, volatility of 176%, risk free interest rate of 0.37%, and dividend yield of 0%. The grant date FV of options was $28,888.
 
The outstanding options (post-reverse stock split) as of June 30, 2012 listed as follow:
 
   
Number of Shares
 
Outstanding at January 1, 2011
   
25,000
 
Exercisable at January 1, 2011
   
12,500
 
         
Granted
   
25,000
 
Exercised
   
-
 
Expired
   
-
 
         
Outstanding at December 31, 2011
   
50,000
 
Exercisable at December 31, 2011
   
37,500
 
         
Granted
   
55,000
 
Exercised
   
-
 
Expired
   
-
 
         
Outstanding at June 30, 2012
   
105,000
 
Exercisable at June 30, 2012
   
77,500
 
 
Options outstanding (post-reverse stock split) at June 30, 2012 are as follows:
 
Exercise Price
   
Total
Options
Outstanding
   
Weighted
Average
Remaining
Life
(Years)
   
Total
Weighted
Average
Exercise
Price
   
Options
Exercisable
   
Weighted
Average
Exercise
Price
 
                                 
$
6.55 - 0.58
     
105,000
     
2.23
   
$
2.61
     
77,500
   
$
3.33
 
 
Warrants

On November 11, 2009, The Company entered into a one-year consulting agreement with an investment relations (“IR”) firm. The Company granted the IR firm warrants to purchase 200,000 shares of the Company’s common stock as compensation for its service. The warrants included Series A warrant and Series B warrant with a term of two years (the “Series A Warrant”, the “Series B Warrant”), to purchase 50,000 shares at $5.00 and $5.50, respectively. The warrants included Series C warrant and Series D warrant with a term of three years (the “Series C Warrant”, the “Series D Warrant”), to purchase 50,000 shares at $6.00 and $6.50, respectively. 35% of all series warrants were vested at the grant date and 65% of all series of the warrants were vested upon the duty of service the IR completed, which was January 5, 2010.
 
 
18

 
 
The FV of the warrants was calculated using the following assumptions: for the warrants with estimated life of two years, volatility of 100%, risk free interest rate of 0.85%, and dividend yield of 0%; for the warrants with estimated life of three years, volatility of 100%, risk free interest rate of 1.39%, and dividend yield of 0%. The total FV of warrants was $868,872.

The Company entered into a one-year consulting agreement with an IR firm on November 1, 2010. The monthly payment at $8,550 was made at the beginning of each month; on December 4, 2010, the Company also granted the IR firm a warrant to purchase 36,000 shares for each 6 months contract period at $5.90, a term of three years which vested on November 1, 2011. The FV of the warrants was calculated using the following assumptions: estimated life of three years, volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%. The grant date FV of warrants was $188,993.
 
On May 30, 2011, the Company granted the IR firm a warrant to purchase the second 36,000 shares at $5.90, over a term of three years which vested on November 1, 2011. If the agreement is cancelled after six months by either party, the IR firm will be entitled to a pro-rata of the warrants for the period services were provided. The FV of the warrants was calculated using the following assumptions: estimated life of three years, volatility of 100%, risk free interest rate of 0.81%, and dividend yield of 0%. The grant date FV of warrants was $33,055. As of June 30, 2012, the agreement is not cancelled.

The Company accounted for warrants issued to investor relations firms based on ASC 505-50 at each balance sheet date and expense recorded based on the period elapsed at each balance sheet date, which is the date at which the counterparty’s performance is deemed to be completed for the period. The FV of each warrant granted is estimated on the date of the grant using the Black-Scholes option pricing model under ASC 505-30-11 and is recognized as compensation expense over the service term of the investor relations agreement as it is a better matching of cost with services received. The warrants are classified as equity instruments and are exercisable into a fixed number of common shares. There is no commitment or requirement to change the quantity or terms based on conditions to the counterparty’s performance or market conditions.

The Company recorded $0 and $20,038 warrant expense in the six months ended June 30, 2012 and 2011; and $0 and $9,967 during the three months ended June 30, 2012, respectively. The outstanding warrants as of June 30, 2012 listed were as follows:

   
Number of Shares
 
Outstanding at January 1, 2011
   
236,000
 
Exercisable at January 1, 2011
   
200,000
 
         
Granted
   
36,000
 
Exercised
   
(17,500)
 
Expired
   
82,500
 
         
Outstanding at December 31, 2011
   
172,000
 
Exercisable at December 31, 2011
   
172,000
 
         
Granted
   
-
 
Exercised
   
-
 
Expired
   
-
 
         
Outstanding at June 30, 2012
   
172,000
 
Exercisable at June 30, 2012
   
172,000
 
 
 
19

 
 
Warrants outstanding at June 30, 2012 are as follows:
 
Exercise Price
   
Total
Warrants
Outstanding
   
Weighted
Average
Remaining
Life
(Years)
   
Total
Weighted
Average
Exercise
Price
   
Warrants
Exercisable
   
Weighted
Average
Exercise
Price
 
                                 
$
$5.00-$6.50
     
172,000
     
0.91
   
$
6.10
     
172,000
   
$
6.10
 

Note 11 – COMMON STOCK AND NON-CASH STOCK COMPENSATION

Stock issued to consultants

On August 18, 2009, the Company entered into four-year consulting agreements to promote the Company's image in both the industry and capital markets. In connection with the agreements, the Company issued 1,000,000 shares of Common Stock valued at $2.70 (stock price at grant date) to eight consultants, and recorded $2,700,000 as deferred compensation. During the six months ended June 30, 2012 and 2011, the Company amortized $337,500 as stock-based compensation for each period; and during the three months ended June 30, 2012 and 2011, the Company amortized $168,750 as stock-based compensation for each period. 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 $85,992 was noncurrent as of June 30, 2012.

On December 14, 2011, the Company entered into a one-year consulting agreement with an IR firm for financial newsletter, business and industry publication campaigning ("Consulting Agreement"). The Company issued 20,000 shares of restricted common stock as the first tranche, valued at $0.63 (stock price at grant date) to the IR firm. During the six and three months ended June 30, 2012, respectively, the Company recorded $6,283 and $3,142 as stock compensation expense.  There was $5,696 as deferred compensation asset as of June 30, 2012, which will be amortized within one year. 

On June 14, 2012, the Company was required to issue the second tranche 20,000 shares of restricted common stock per agreement dated December 14, 2011, valued at $0.87 (stock price at grant date) to the IR firm. During the six and three months ended June 30, 2012, the Company recorded $1,621 as stock compensation expense. There was $15,779 deferred compensation as an asset as of June 30, 2012, which will be amortized within one year. 
 
On July 23, 2012, the Company entered into an Amendment to the Consulting Agreement. Originally, the Company was to pay $8,000 per month at the first of each month and issue 20,000 shares of Common stock upon signing of the Agreement, and another 20,000 shares of Common stock 180 days after the Consulting Agreement was signed. In the Amendment, the compensation term was revised such that the Company is to pay $0 per month from the date of the Amendment and issue 20,000 shares of common stock upon signing of the Agreement, and 60,000 shares of Common stock 180 days after the contract was signed. As of June 30, 2012, additional $34,800 stock compensation expense will be amortized within one year of the Amendment to the Agreement.

Note 12 – INCOME TAXES
 
As of June 30, 2012, the Company in the US had $4,775,000 in net operating loss (“NOL”) carry forwards available to offset future taxable income. Federal NOLs can generally be carried forward 20 years. The deferred tax assets for the US entities at December 31, 2011 consisted mainly of NOL 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 June 30, 2012. Accordingly, the Company has no net deferred tax assets.
 
 
20

 

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.
 
Anytone and Kim Fai’s effective Enterprise Income Tax (“EIT”) for 2012 is 25% and 2011 is 24%.

The following is a reconciliation of the provision for income taxes at the US federal income tax rate to the income taxes reflected in the Statement of Operations and Comprehensive Income (Loss) for the six and three months ended June 30, 2012 and 2011, respectively:
 
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
US statutory rates
   
(34.0
)%
   
34.0
%
   
(34.0
)%
   
34.0
%
Tax rate difference
   
8.4
%
   
(10.2
)%
   
8.6.
%
   
(10.2
)%
Effect of tax holiday
   
-
     
(1.2
)%
   
-
     
(1.2
)%
Goodwill impairment
   
17.8
%
     
-
   
21.0
%
     
-
Valuation allowance on deferred tax on US NOL
   
5.3
%
   
4.6
%
   
3.3
%
   
4.6
%
Tax expense at actual rate
   
(2.5
)%
   
27.2
%
   
(1.1
)%
   
27.2
%
 
The provisions for income taxes expense (benefit) for the six and three months ended June 30, 2011 and 2010 consisted of the following:

   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Income tax expense (benefit) - current
 
$
(40,481
 
$
1,895,934
   
$
14,682
   
$
789,661
 
Income tax expense (benefit) - deferred
   
(259,132
)
   
(239,879
   
 (129,566
   
(120,707
Total income tax expenses (benefit)
 
$
(299,613
 
$
1,656,055
   
$
(114,884
 
$
668,954
 

Note 13 – LOAN AGREEMENTS

Loan Agreement with Chuangding Investment Consulting (Shenzhen) Co., Ltd.
 
On April 21, 2011, the Company entered into a Loan Agreement with Chuangding Investment Consulting (Shenzhen) Co., Ltd. (“CIC”). Under the CIC Loan Agreement, CIC committed to make advances to the Company up to RMB 30,000,000 ($4,766,217) with interest at 10% (the “CIC Loan”). Repayments under the CIC Loan Agreement are due 730 days from the date the CIC Loan is made. The Company can repay all principal and interest in one lump sum when the CIC Loan comes due, or can repay the CIC Loan in installments. The CIC Loan has no processing fee or management fee.
 
 
21

 
 
The CIC Loan Agreement is guaranteed by Weihu Yu, the Company’s Chairman, pursuant to a Guarantee Letter, dated April 21, 2011, made by Weihu Yu to CIC (the “CIC Guarantee Letter”) for two years commencing at the date of maturity of the CIC Loan Agreement. The CIC Loan Agreement is also secured by 539,091 shares of the Company’s common stock held by GoldRiver Industrial Holding Limited (“GoldRiver”) pursuant to a Security Agreement, dated April 21, 2011, by and between GoldRiver and CIC (the “CIC Security Agreement”). Weihu Yu is the beneficial owner of the shares held by GoldRiver. The security interest granted under the CIC Security Agreement terminates two years after the statute of limitation expires for which CIC can make a claim under the CIC Loan. The CIC Loan Agreement contains affirmative covenants that, among other things, require the Company to deliver to CIC financial statements and other relevant materials. The CIC Loan Agreement also gives CIC priority rights in the event that the Company needs financing, including equity investment, strategic investor introduction or share ownership restructuring. Any failure by the Company to comply with these covenants and any other obligations under the CIC Loan Agreement could result in an event of default which could lead to acceleration of the amounts owed and other remedies.

As of June 30, 2012 and December 31, 2011, the Company did not have an outstanding balance under the CIC Loan.
 
Loan Agreement with Beijing Guojincheng Asset Management Co., Ltd.
 
On April 21, 2011, the Company also entered into a Loan Agreement (the “GJC Loan Agreement”) with Beijing Guojincheng Asset Management Co., Ltd. (“GJC”). Under the GJC Loan Agreement, GJC committed to make advances to the Company up to RMB 30,000,000 ($4,766,217) with interest at 10% (the “GJC Loan”). Repayments of the Loan under the GJC Loan Agreement are due 730 days from the date the GJC Loan is made. The Company can repay all principal and interest in one lump sum when the GJC Loan comes due, or can repay the GJC Loan in installments. The GJC Loan has no processing fee or management fee.
 
The GJC Loan Agreement is guaranteed by Weihu Yu pursuant to a Guarantee Letter, dated April 21, 2011, made by Weihu Yu to GJC (the “GJC Guarantee Letter”) for two years commencing at the date of maturity of the GJC Loan Agreement. The GJC Loan Agreement is also secured by 539,091 shares of the Company’s common stock held by GoldRiver pursuant to that certain Security Agreement, dated April 21, 2011, by and between GoldRiver and GJC (the “GJC Security Agreement”). Weihu Yu is the beneficial owner of the shares held by GoldRiver. The security interest granted under the GJC Security Agreement terminates two years after the statute of limitation expires for which GJC can make a claim under the GJC Loan. The GJC Loan Agreement contains covenants that, among other things, require the Company to deliver to GJC financial statements and other relevant materials. The GJC Loan Agreement also gives GJC priority rights in the event that the Company needs financing, including equity investment, strategic investor introduction or share ownership restructuring. Any failure by the Company to comply with these covenants and any other obligations under the GJC Loan Agreement could result in an event of default which could lead to acceleration of the amounts owed and other remedies.

As of June 30, 2012 and December 31, 2011, the Company did not have an outstanding balance under the GJC Loan.

Note 14 – STATUTORY RESERVES
 
Surplus Reserve Fund

The Company’s Chinese subsidiaries are required to transfer 10% of each subsidiary’s net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The Company’s Chinese subsidiaries are not required to make appropriation to other reserve funds and do not intend to make appropriations to any other reserve funds. There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Company’s Chinese subsidiaries do not do so.
 
The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
 
 
22

 
 
Common Welfare Fund
 
Common welfare fund is a voluntary fund that the Company can elect to transfer 5% to 10% of its net income to this fund. This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. The Company did not contribute to this fund.
 
Note 15 - MAJOR CUSTOMERS AND VENDORS

Below is the table indicating the major customers accounting for over 10% of the Company’s total sales. At June 30, 2012, the total accounts receivable balance due from these four customers was $710,852.
 
   
Six months ended June 30,
   
Three months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
CEIEC
    16 %     *       17 %     *  

Below is the table indicating the major vendors accounting for over 10% of the Company’s total purchases. At June 30, 2012, the total payable to these vendors was $172,806 and $69,552.
 
   
Six months ended June 30,
   
Three months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
XingZhiJie
    12 %     *       25 %     *  
RunFeng
    *       *       10 %     *  
ChuangYi
    *       *       *       13 %
 
*  Less than 10%.

Note 16 – SEGMENT REPORTING
 
The Company had three operating segments: battery components manufacture, battery assembly and distribution, and solar panel manufacture. The Company disposed of battery components manufacture segment through the disposition of E’Jenie. These remaining 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 and chief financial officers were 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, the Company does not identify assets by segment.
 
 
23

 

   
Six months ended June 30,
   
Three months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues from unaffiliated customers:
 
Battery
 
$
4,988,308
   
$
11,953,882
   
$
1,991,447
   
$
4,984,984
 
Solar panel
   
3,557,301
     
11,675,972
     
1,598,897
     
6,161,054
 
Consolidated
 
$
8,545,609
   
$
23,629,854
   
$
3,590,344
   
$
11,146,038
 
Operating income (loss):
                               
Battery
 
$
(1,532,595
 
$
4,164,421
   
$
(645,253
 
$
1,530,295
 
Solar panel
   
(9,487,217
   
2,728,684
     
(8,918,917
   
1,253,990
 
Corporation
   
(845,348
)
   
(816,552
)
   
(457,040
)
   
(331,180
)
Consolidated
 
$
(11,865,160
 
$
6,076,553
   
$
(10,021,210
 
$
2,453,105
 
Net income (loss) from continuing operations
                               
Battery
 
$
(1,146,106
 
$
3,167,962
   
$
(450,561
 
$
1,163,782
 
Solar panel
   
(9,557,062
   
2,076,211
     
(8,988,762
   
954,570
 
Corporation
   
(845,702
)
   
(816,888
)
   
(457,245
)
   
(331,303
)
Consolidated
 
$
(11,548,870
 
$
4,427,285
   
$
(9,896,568
 
$
1,787,049
 
Depreciation and amortization:
                               
Battery
 
$
1,043,575
   
$
1,007,276
   
$
521,632
   
$
506,683
 
Solar panel
   
15,918
     
14,156
     
8,090
     
7,279
 
Consolidated
 
$
1,059,493
   
$
1,021,432
 
$
529,722
   
$
513,962
 
* Excluding disposed subsidiaries NewPower and E’Jenie.

The Company does not identify assets by segment.
   
Note 17 – DISPOSAL OF SUBSIDIARIES
 
Disposal of Subsidiaries

On November 24, 2011, the Company entered into an Equity Transfer Agreement with Xuemei Fang (“Fang”) and Weirong Xu (“Xu”, and together with Fang, the “Buyers”) to transfer 100% of the equity interest of Billion to the Buyers for RMB 85,553,893 ($13.50 million). The selling price equals the appraisal value of Billion, including its wholly-owned subsidiaries E’Jenie and NewPower, less RMB 153,033,107 ($24.16 million) the Company owes E’Jenie, which shall be cancelled upon completion of the Equity Transfer. Xu was the Director of Marketing of NewPower and Fang was the Vice President of E’Jenie at the time of the sale. 20% of the purchase price was paid upon the registration of the Equity Transfer with the relevant PRC authority. Thereafter, the Buyers will pay approximately $920,000 (RMB 5,800,000) every two months until the purchase price is paid in full.   As of July 31, 2012, the Company received RMB36,189,824 ($5,721,802) and had an outstanding receivable of RMB49,364,068 ($7,804,719).
 
 
24

 
 
The following table summarizes the fair values of the assets and liabilities disposed assumed at the date of disposal. The fair values of the assets disposed and liabilities assumed at the agreement date are used for the purpose of selling price allocation. The excess of the selling price over the FV of the net assets disposed of $292,067 was recorded as disposal gain.

Cash
 
$
4,033,446
 
Accounts receivable
   
2,626,389
 
Other receivable
   
24,156,003
 
Inventory
   
518,457
 
Taxes receivable
   
1,297,924
 
Property and equipment, net
   
912,775
 
Intangible assets, net
   
6,285,970
 
Accounts payable
   
(861,597
)
Other payable and accrued expenses
   
(241,125
)
Deferred tax liability
   
(1,362,935
)
Disposal gain
   
292,067
 
Selling price
 
$
37,657,374
 

Note 18- COMMITMENTS

Anytone leases its office under a renewable operating lease expiring December 30, 2013. The monthly rent is $13,000. On January 1, 2011, Kim Fai entered into two 3-year leases with monthly payments of $6,200 and $1,600, respectively.
 
For the six months ended June 30, 2012 and 2011, rent expense was $134,800 and $123,200; for the three months ended June 30, 2012 and 2011, rent expense was $67,800 and $62,000, respectively.
 
Future minimum rental payments required under operating leases as of June 30, 2012 are as follows by years:

2013
 
$
269,000
 
2014
   
135,000
 
   
$
404,000
 
 
 
25

 
 
Note 19- CONTINGENCY
 
Class Action by Investors

In February 2012, two separate securities class action complaints were filed in the US District Court for the Southern District of New York (“SDNY”) against the Company and certain of its current and former officers and directors. The complaints alleged the Company issued materially false and misleading statements and omitted to state material facts that rendered its statements misleading as they related to the Company’s financial performance, business prospects, and financial condition, and that the defendants failed to prevent such statements from being issued or corrected, during a putative class period between April 15, 2010 and November 14, 2011. The complaints seek, among other relief, compensatory damages and attorneys’ fees. On May 10, 2012, the Court consolidated the two complaints for all purposes under the caption In re New Energy Systems Group Sec. Litig., and appointed a lead plaintiff.  The Company believes it is likely that a consolidated amended complaint will be filed shortly. The Company has not yet responded to either complaint, but the Company believes the lawsuit has no merit and intends to vigorously defend against it. While certain legal defense costs may be later reimbursed by the Company’s insurance carrier, no reasonable estimate of the litigation or related legal fees on the financial statements can be made as of the date of this statement.

Derivative Action by Shareholder

In April 2012, a shareholder derivative complaint entitled Campbell, et al. v. Yu, et al. was filed in the US District Court for the SDNY by a shareholder purporting to act on behalf of the Company against certain of the Company's current and former officers and directors, and the Company's independent auditor Goldman Kurland & Mohidin LLP. The Company is named as a nominal defendant. The complaint asserts causes of action for breach of fiduciary duty and gross mismanagement against the officer and director defendants, and a claim for unjust enrichment against the Company's auditor, based upon allegations that the defendants caused the Company to issue materially false and misleading statements relating to the Company’s financial performance, business prospects, and financial condition. The complaint seeks, among other relief, compensatory damages, restitution and attorneys’ fees.  Plaintiffs' counsel has stated that they intend to file an amended complaint shortly. None of the defendants have responded to the original complaint, and no discovery has occurred.  The Company believes the initial complaint has no merit. While certain legal defense costs may be later reimbursed by the Company’s insurance carrier, no reasonable estimate of the outcome of the litigation or related legal fees on the financial statements can be made as of the date of this statement.
 
Note 20- SUBSEQUENT EVENT
 
On July 23, 2012, the Company entered into an Amendment to the Consulting Agreement ("Amendment"). Originally, the Company was to pay $8,000 per month at the first of each month and issue 20,000 shares of Common stock upon signing of the Consulting Agreement, and another 20,000 shares of Common stock 180 days after the Consulting Agreement was signed. In the Amendment, the compensation term was revised such that the Company is to pay $0 per month from the date of the Amendment and issue 20,000 shares of common stock upon signing of the Consulting Agreement, and 60,000 shares of Common stock 180 days after the Consulting Agreement was signed. As of June 30, 2012, additional $34,800 stock compensation expense will be amortized within one year of the Amendment.
 
 
26

 

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
 
Forward-Looking Statements
 
Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission (“SEC”).

In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology. Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place too much reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any forward-looking statement after the date of this Report.

BUSINESS OVERVIEW

We operate our business through our wholly-owned subsidiaries Shenzhen Anytone Technology Co., Ltd. ("Shenzhen Anytone") and Shenzhen Kim Fai Solar Energy Technology Co., Ltd. ("Kim Fai"), companies incorporated under the laws of the Peoples’ Republic of China (“PRC” or “China”).

Through our subsidiaries, we manufacture and distribute lithium battery related products, solar panels, and solar related products in China. Our marketing team maintains relationships with our current customers and also searches for potential new customers. We seek to maintain and strengthen our position as a provider of lithium battery related products, solar panels, and solar related products while we also strive to improve the breadth of our product line and to improve the quality of our products.

In August 2008, under the then depressed economic environment, management of the Company made some adjustments to keep the Company running and growing. To keep the existing battery pack accessories segment, the Company expanded into a related field – finished battery packs’ assembly and distribution, to diversify our line of products; consequently, the Company competes in the entire battery industry.

Lithium battery was created in the 1990s, with the 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 other electronic products. Batteries are becoming smaller, lighter, more efficient, longer lasting and free of pollution.  Lithium battery energy/weight ration is higher than other batteries on the market. With an excellent safety standard. We beleive lithium battery is the future of the industy. According to Market Research, the market for lithium ion battery is expected to reach $43 billion by 2020. China has become one of the largest producers and consumers of lithium ion batteries. We anticipate there will be greater demand for lithium batteries in China and worldwide in the next few years. We believe the current trend towards smaller, lighter portable consumer products will continue and because of its size, the demand for lithium batteries will keep increasing.
 
 
27

 

Having engaged in the battery business for years, management of the Company has accumulated abundant knowledge about the battery industry, established a network among battery companies which are both upstream and downstream in the battery distribution flow, and gained a lot of experience in battery distribution. Assembling and distributing finished batteries has a higher profit margin than manufacturing battery accessories, so management of the Company believed our battery distribution business will be profitable due to the outstanding battery quality and strong distribution network the Company has.

On December 7, 2009, we closed the transactions contemplated by the share exchange agreement dated November 19, 2009 with Anytone International (HK) Co., Ltd. (“Anytone International”) and Shenzhen Anytone. Pursuant to the share exchange agreement, we issued the shareholders of Anytone International 3,593,939 shares of the Company's restricted common stock and paid $10,000,000 in cash. Shenzhen Anytone is the Chinese operating subsidiary of Anytone International, collectively referred to a “Anytone.” Anytone is engaged in the production of mobile power and related power backup products.

Through Anytone, we develop and market our branded mobile power and related power backup devices. Shenzhen Anytone was founded in 2005 and has ability in Researh and Development ("R&D") and marketing. In addition, Anytone has built its brand name in China and its products are sold to end consumers directly. By focusing on R&D and marketing, Anytone only produces sample products in-house for testing.  It primarily outsources its production to third parties it has certified.

Mobile power units are lithium ion batteries’ application products. Currently, more and more advanced portable consumer electronic products are introduced to the market, such as laptops, smartphones, tablet PCs, etc. All these products consume power at a high rate. The original single lithium ion battery is not enough to support these products. Mobile power units are the solution. Compared to the creation of lithium ion battery in the 1990s, mobile power was started around 10 years ago and became popular and competitive in the past few years. The increasing competition is due to 1) increasing demand – many consumers have more than one portable consumer electronic device which need power support; 2) higher profits – mobile power units are sold to end consumers directly; 3) low technology limit – a mobile power unit includes three major components, battery cells, PCBs and cases. Therefore, most lithium ion battery related manufacturers can easily find a niche market; 4) no industry standards – mobile power is still a new business in the lithium ion battery industry without official standards. Therefore, this market is rampant with counterfeit products. However, we believe this market is still in its early stage. Once official industry standards are created and the consumers’ feedbacks are accumulated, only those products with real quality will survive.

On January 12, 2010, we closed the transactions contemplated by the share exchange agreement dated December 11, 2009 with NewPower. Pursuant to the share exchange agreement, our Chinese subsidiary E’jenie acquired NewPower. We issued the shareholders of NewPower 1,823,346 shares of the Company’s restricted common stock and paid them $3,000,000 in cash. NewPower is engaged in manufacturing and distribution of lithium battery cells.

On November 10, 2010, the Company’s subsidiary, Shenzhen Anytone executed a share exchange agreement to acquire from all the equity interest of Kim Fai, a Chinese company engaging in the technology development and sale of solar application products and solar energy batteries, all shareholders of Kim Fai. The price for the total outstanding stock of Kim Fai was $13,303,236 paid in cash, and 1,913,265 shares of common stock valued at $14,999,998, which was determined by multiplying the 1,913,265 shares by the stock price of New Energy on November 10, 2010. As of September 30, 2011, $13,303,326 was paid and 1,913,265 shares were issued.

On November 24, 2011, the Company entered into an Equity Transfer Agreement (“Equity Transfer”) with Xuemei Fang (“Fang”) and Weirong Xu (“Xu”, and together with Fang, the “Buyers”) to transfer 100% of the equity interest of Billion Electronics Limited (BVI) to the buyers for RMB85,553,892 ($13,578,043). The selling price equaled the appraised value of Billion Electronics, including its wholly owned subsidiaries E’Jenie and NewPower, less RMB153,033,107 ($24,287,500) of debt the Company owed E’Jenie, which shall be cancelled upon completion of the Equity Transfer. Xu is the Director of Marketing of NewPower and Fang is the Vice President of E’Jenie.  As of June 30, 2012, the Company received RMB 36,189,824 ($5,721,802) and had an outstanding receivable of RMB 49,364,068 ($7,804,719).
 
During the third quarter of 2011, the Company performed annual goodwill impairment assessment for NewPower. During the fourth quarter of 2011, the Company performed annual goodwill impairment assessment for Anytone and Kim Fai. The goodwill balance prior to the impairment charge was $60,858,842 and was established primarily as a result of a series acquisition of NewPower, Anytone and Kim Fai in 2010 and 2011. The Company completed the step one analysis using a combination of market capitalization approach and discounted cash flow. The market capitalization approach uses the Company’s publicly traded stock price to determine fair value (“FV”). The Discounted Cash Flow (“DCF”) method uses revenue and expense projections and risk-adjusted discount rates. The process of determining FV is subjective and requires management to exercise judgment in determining future growth rates, discount and tax rates and other factors. The current economic environment has impacted the Company’s ability to forecast future demand and has in turn resulted in the use of higher discount rates, reflecting the risk and uncertainty in current markets. The results of the step one analysis indicated potential impairment in NewPower and Anytone reporting units, which were corroborated by a combination of factors including a significant and sustained decline in the market capitalization, which was significantly below the book value, and the deteriorating macro environment, which has resulted in a decline in expected future demand. The Company therefore performed the second step of the goodwill impairment assessment for NewPower and Anytone to quantify the amount of impairment. This involved calculating the implied FV of goodwill, determined in a manner similar to a purchase price allocation, and comparing the residual amount to the carrying amount of goodwill. Based on the analysis incorporating the declining market capitalization in 2011, as well as the significant end market deterioration and economic uncertainties impacting expected future demand including continued slow-down of the battery industry in China, and increased competition resulting from counterfeit products and decreased selling price from other manufacturers. The Company concluded the entire goodwill balance of NewPower of $14,306,538 and a portion of Anytone’s goodwill of $7,405,344 were impaired and recorded in operating expense. The goodwill impairment charge is non-cash. The goodwill impairment charge is not deductible for income tax purposes and, therefore, the Company did not record a corresponding tax benefit in 2011. On December 9, 2011, the Company disposed its subsidiaries Billion, E’jenie and NewPower. As of June 30, 2012, due to continuing losses, utilizing DCF analysis, the Company concluded intangible assets (primarily patents) and goodwill were impaired in the amounts of $5,711,877 and $2,708,219, respectively.
 
 
28

 
 
Effective on January 13, 2012, Kim Fai’s business, including all the assets and liabilities, were transferred into Shenzhen Anytone to maximize operational efficiency and save costs.  All of Kim Fai’s products will be sold under the “Anytone” brand name.  Kim Fai was owned 100% by Shenzhen Anytone; accordingly, this business transfer was recorded at historical cost due to the equity being under common control. Kim Fai will be dissolved after the transfer and is currently in the process of deregistration.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011
 
The following table presents certain consolidated statements of operations information for the three months ended June 30, 2012 and 2011. The discussion following the table is based on these results. Certain columns may not add due to rounding.

   
2012
   
% of Sales
   
2011
   
% of Sales
 
Net sales
                       
Battery
 
$
1,991,447
     
55
%
 
$
4,984,984
     
45
%
Solar panel
   
1,598,897
     
45
%
   
6,161,054
     
55
%
Total revenue
   
3,590,344
     
100
%
   
11,146,038
     
100
%
                                 
Cost of sales
                               
Battery
   
1,763,945
     
49
%
   
2,466,610
     
22
%
Solar panel
   
1,527,426
     
43
%
   
4,676,631
     
42
%
Total cost of sales
   
3,291,371
     
92
%
   
7,143,241
     
64
%
                                 
Gross profit
   
298,973
     
8
%
   
4,002,797
     
36
%
                                 
Operating expenses
                               
Selling
   
323,378
     
9
%
   
276,110
     
2
%
General and administrative
   
1,576,709
     
44
%
   
1,273,582
     
11
%
Impairment of goodwill and intangible assets
   
8,420,096
     
235
%
   
-
     
-
%
Total operating expenses
   
10,320,183
     
287
%
   
1,549,692
     
14
%
                                 
Income (loss) from operations
   
(10,021,210
)
   
(279
)%
   
2,453,105
     
22
%
                                 
Other income, net
   
9,758
     
-
%
   
2,898
     
-
%
                                 
Income (loss) before income taxes
   
(10,011,452
)
   
(279
)%
   
2,456,003
     
22
%
                                 
Income tax expense (benefit)
   
114,884
     
3
%
   
(668,954
)
   
(6
)%
                                 
Income (loss) from continued operations, net of tax
   
(9,896,568
)
   
(276
)%
   
1,787,049
     
16
%
Income from discontinued operations, net of tax
   
-
     
-
%
   
1,359,824
     
12
%
Net income (loss)
 
$
(9,896,568
)
   
(276
)%
 
$
3,146,873
     
28
%
 
 
29

 
 
Net Sales

Net sales for the three months ended June 30, 2012 was $3.59 million, compared to $11.15 million for the comparable period of 2011, a decrease of $7.56 million or 68%. Battery production and sales, mainly from Anytone, was $2.00 million for the three months ended June 30, 2012 compared to $4.98 million in the comparable period of 2011, a decrease of $2.99 million or 60%. Sales of solar products was $1.60 million in the three months ended June 30, 2012, compared to $6.16 million in the comparable period of 2011, a decrease of $4.56 million or 74%. The decrease was mainly due to (1) the battery industry being depressed in China and market competition intensifying; and (2) integration of the business section, resulting in reduced production and a 71% decrease in sales volume of batteries during the three months ended June 30, 2012 as compared to the same period of 2011.

Cost of Sales

Cost of Sales ("COS") for the three months ended June 30, 2012 was $3.29 million, as compared to $7.14 million for the comparable period of 2011, a decrease of $3.85 million, or 54% due to decreased sales and production volume.

COS for the battery segment was $1.76 million, or 89% of total battery revenue, for the three months ended June 30, 2012, compared to $2.47 million, or 49%, for the comparable period of 2011, a decrease of $0.70 million, or 28%.

COS for solar products for the three months ended June 30, 2012 was $1.53 million, or 95% of solar products sales, as compared to $4.68 million or 76% of sales for the comparable period of 2011, a decrease of $3.15 million, or 67%.

The decrease of total COS was due to decreased sales and production volume.  The percentage increase for COS to sales was mainly due to the increase of direct labor cost and the price increase of certain raw materials, as well as decreased production and sales volume. As a result, the increased variable cost absorbed by products increased in the three months ended June 30, 2012 compared to the comparable period of 2011. We raised our employees’ salaries as a result of overall inflation in China. Our workshop workers' base salary increased 15% in the three months ended June 30,  2012 compared to the comparable period of 2011.

Operating Expenses

Selling, general and administrative expenses were $1.90 million for the three months ended June 30, 2012 , or 53% of net revenue, as compared to $1.55 million, or 14% of net revenue, for the comparable period of 2011, an increase of $0.35 million, or 23%.

Selling expenses for the three months ended June 30, 2012 were $0.32 million, or 9% of net revenue, compared to $0.28 million, or 2% of net revenue, for the comparable period of 2011, an increase of $0.05 million, or 17%, which was mainly due to the increased marketing expenses including $0.11 million of advertisement and promotional expenses of $0.11 million.
 
General and administrative (“G&A”) expenses for the three months ended June 30, 2012 were $1.58 million, or 44% of net revenue, compared to $1.27 million, or 11% of net revenue, for the comparable period of 2011.  The increase in G&A expenses of $0.30 million was mainly due to the increase of $0.19 million of employees’ salaries and welfare expenses. For the three months ended June 30, 2012 and 2011, the US parent company recorded $0.46 million and $0.33 million as G&A expenses, respectively. These expenses mainly included stock option and warrant compensation paid to our directors and employees and certain expenses relating to being a public company in the US, such as accounting and legal fees.

During the three months ended June 30, 2012, the Company performed a goodwill and intangible asset impairment test resulting in $8.42 million impairment to goodwill and intangible assets of Anytone and Kim Fai.
 
 
30

 

Income From Discontinued Operations, net of tax

Net income from discontinued operations, net of tax was $0 for the three months ended June 30, 2012, as compared to $1.36 million for the comparable period of 2011, which was mainly from the disposed subsidiaries, Shenzhen NewPower Technology Development Co., Ltd. ("NewPower") and E’Jenie Technology Development Co., Ltd. ("E’Jenie").

Net Income (Loss)

Net loss for the three months ended June 30, 2012 was $9.90 million compared to net income of $3.15 million for the comparable period of 2011, a decrease of $13.04 million, or 414%, mainly due to goodwill impairment of $8.42 million in the first quarter of 2012.

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
 
The following table presents certain consolidated statements of operations information for the six months ended June 30, 2012 and 2011. The discussion following the table is based on these results. Certain columns may not add due to rounding.

   
2012
   
% of Sales
   
2011
   
% of Sales
 
                         
Net sales
               <