Description
New Energy Sys. CEO Weihe Yu bought 501,300 shares on 6-15-2012 at $ 0.72
BUSINESS OVERVIEW
Overview
We were incorporated in Nevada on March 27, 2001 under the name Jasmine's Garden. Currently, we operate our business through our wholly-owned subsidiaries, Billion Electronic Co., Ltd., a company organized under the laws of the British Virgin Islands on July 27, 2004 (“Billion”), Shenzhen E'Jenie Technology Development Co., Ltd, a company incorporated under the laws of the People’s Republic of China (“PRC” or “China”) on July 8, 2002 (“E’Jenie”), Shenzhen NewPower Technology Co., Ltd. (“NewPower”), a company organized under the laws of the PRC in 2004, Anytone International (H.K.) Co., Ltd. (“Anytone International”), a company organized under the laws of Hong Kong in 2009, Shenzhen Anytone Technology Co., Ltd. (“Shenzhen Anytone”), a company incorporated under the laws of the PRC in 2005, and Shenzhen Kim Fai Solar Energy Technology Co., Ltd. ("Kim Fai"), a company organized under the laws of the PRC in 2005.
Currently, after disposing of two decreasing businesses, we are focused on our mobile power, solar panels and solar related applications business. Our mobile power products provide backup power to various leading consumer electronic devices in the market. These mobile power products are mainly sold under our own brand name, Anytone in China but also through private labels internationally. Besides the sales of solar panels, our solar business is focused on integration of solar power and lithium ion battery storage to create solar consumer electronic products .
On November 15, 2004, we acquired Billion and its wholly-owned operating subsidiary, E’Jenie. Through E'Jenie, we manufacture and distribute lithium battery shells and related products primarily in China. Based upon specifications from its customers E'Jenie develops, customizes and produces steel, aluminum battery shells and aluminum caps. Currently, E'Jenie produces fourteen steel battery shell lines, nine aluminum battery shell lines, three aluminum battery cap lines and three steel battery cap lines.
On June 28, 2006, we acquired Galaxy View and its wholly-owned operating subsidiary Sono Digital Electronic Technologies Co., Ltd., a company incorporated under the laws of the People’s Republic of China on May 29, 2001 (“Sono”). As described below in our Corporate History, Galaxy View entered into an Agreement on Transfer of Shares with Lui Changqing and Wang Feng. As a result of this agreement, Galaxy View and Sono were spun-off from the Company and is no longer a subsidiary of the Company.
In August, 2008, we entered into a related business field, battery assembly and finished battery distribution, to diversify our line of products. We purchase batteries from suppliers, package and sell these batteries under E’Jenie’s brand name to other mobile device OEM manufacturers. These are all lithium ion batteries and have various models for different kinds of portable electronic devices.
On December 7, 2009 we acquired Anytone International and its wholly owned operating subsidiary Shenzhen Anytone, a company incorporated under the laws of the People’s Republic of China in 2005. Shenzhen Anytone is the Chinese operating subsidiary of Anytone International, collectively referred to as “Anytone”. Anytone engages in research, manufacture and sell of mobile backup power systems for mobile phones, laptops, solar, MP4, PMPs, PDAs, DC and digital applications.
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, the Company’s subsidiary E’Jenie acquired NewPower. The Company issued the shareholders of NewPower, proportionally among the NewPower Shareholders in accordance with their respective ownership interests in NewPower immediately before the closing of the share exchange, 1,823,346 shares of the Company’s common stock with a restrictive legend, and $3,000,000. NewPower is engaged in manufacturing and distribution of lithium batteries.
On November 24, 2011, the Company entered into an equity transfer agreement to transfer 100% of the equity interest of Billion, including its subsidiaries E’Jenie and NewPower, for a cash consideration of RMB 85,553,892.75 (approximately $13,549,443).
Corporate History
Until December 2, 2003, we operated a nationwide wholesale and retail business selling greeting cards, note cards and gift tags made from a design process involving photography and computer graphics. On December 2, 2003, Cheering Limited, an investment holding company organized under the laws of the British Virgin Islands ("Cheering"), acquired 5,700,000 shares of our common stock, par value $0.001, which constituted approximately 95% of the then issued and outstanding shares of our common stock from Jack and Jasmine Gregory, our former officers and directors, for cash of $221,221 (the "Cheering Transaction").
On March 17, 2004, we sold 30,000,000 shares of common stock at a per share purchase price of $0.05 to seven unaffiliated individuals in a private placement, which yielded $1,500,000 (the "Private Placement"). As a condition to the closing of the Private Placement, each of the investors executed an irrevocable proxy granting Mr. Sun, our former President and Chief Executive Officer, the right to vote all shares of the common stock purchased in the Private Placement. The irrevocable proxies expired on May 1, 2004, however, the investors and Mr. Sun extended the irrevocable proxies to May 2006. Mr. Sun as the Chairman and Chief Executive Officer of Cheering is the beneficial owner of the 5,700,000 shares of common stock, which represents approximately 7.8%, of the issued and outstanding shares of our common stock and prior to the expiration of the irrevocable proxies, Mr. Sun will have the power to vote or direct the voting of 30,000,000 shares issued in the Private Placement. As a result, until the irrevocable proxies expire on May 1, 2006, Mr. Sun will control approximately 48.9% of our issued and outstanding common stock.
On April 28, 2004, we filed a certificate of amendment to our articles of incorporation with the Nevada Secretary of State to increase our authorized common stock to 140,000,000 shares and to authorize 60,000,0000 shares, par value $0.001, of blank check preferred stock.
On September 3, 2004, we filed a certificate of amendment to our articles of incorporation with the Nevada Secretary of State to change our name from "Jasmine's Garden" to "China Digital Communication Group."
In connection with the acquisition of Galaxy View, the Company issued Series A Preferred Stock to the selling shareholders. On June 29, 2006, the Company filed with the Secretary of State of Nevada a Certificate of Designation of Series A Convertible Preferred Stock designating 7,575,757 of the Company’s previously authorized preferred stock. Each share of Series A Preferred Stock entitles the holder to seven votes per share on all matters to be voted on by the shareholders of the Company and is mandatorily convertible into one tenth of one share of the Company’s common stock on June 29, 2011 (after providing for the July 13, 2009, 10-to-1 reverse stock split of the Company’s common stock). Each share of Series A Preferred Stock shall, with respect to rights on liquidation, dissolution or winding up, ranks (i) on a parity with the Company’s common stock, and (ii) junior to any other class of the Company’s preferred stock. Series A Preferred Stock is not entitled to any preferred dividend. However, the preferred shareholders will share the dividend on common stock proportionately if and when the dividend on Common Stock is declared.
On July 13, 2009, we effected a 10-to-1 reverse split of our common stock.
Effective November 18, 2009 we changed our name from China Digital Communication Group to New Energy Systems Group.
On 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, which was approved by Company's board of directors and a majority of the Series A holders, the Series A is convertible at the option of the holder until June 29, 2011, when every ten (10) issued and outstanding shares of Series A shall be automatically convertible into one (1) share of common stock (on a post-split basis). Additionally, the Series A shall continue to 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.
Acquisition of Billion
On November 15, 2004, pursuant to a Share Exchange Agreement (the "Billion Exchange Agreement") dated as of September 17, 2004, by and among the Company, Billion, the shareholders of Billion (the "Billion Shareholders") and E'Jenie, we acquired from the Billion Shareholders (the "Billion Acquisition") all of the issued and outstanding equity interests of Billion (the "Billion Shares"). Billion is a holding company and the sole shareholder of E'Jenie. Billion has no other assets other than the shares of E'Jenie. As consideration for the Billion Shares, we paid to the Billion Shareholders $1,500,000 in cash and issued to them 4,566,210 shares of our common stock. The consideration for the Billion Acquisition was determined through arms length negotiations between us and Billion. As a result of the Billion Acquisition we are the sole shareholder of Billion through which we own all of the issued and outstanding equity interests of E'Jenie.
In connection with the Billion Acquisition we entered into a Guarantee Agreement, dated October 9, 2004, as amended October 11, 2004 (the "Guarantee"), with Shiji Ruichen Guaranty and Investment Co. Ltd., a company incorporated under the laws of the Peoples Republic of China ("Shiji"). Pursuant to the terms of the Guarantee, Shiji agreed to guarantee our performance and the performance of the Billion Shareholders under the Billion Exchange Agreement. As consideration for Shiji's guaranty, we issued to Shiji 1,919,016 shares of our common stock. As security for our obligations under the Guarantee, one of our principal shareholders deposited 5,000,000 of their shares of our common stock into escrow.
Acquisition of Galaxy View
On June 29, 2006, pursuant to the terms of a Share Exchange Agreement (the "Galaxy View Exchange Agreement") dated as of March 22, 2006, by and among the Company, Galaxy View, the shareholders of Galaxy View (the " Galaxy View Shareholders") and Sono, we acquired from the Galaxy View Shareholders (the "Galaxy View Acquisition") all of the issued and outstanding equity interests of Galaxy View (the "Galaxy View Shares"). As consideration for the Galaxy View Shares, we paid the Galaxy View Shareholders $3,000,000 in cash and issued to them 7,575,757 shares of our preferred stock. On a post-split basis, the consideration for the Acquisition was determined through arms length negotiations between us and Galaxy View.
During the first quarter of 2007, Sono lost two of their largest customers and users of their products. The fact that the telecom industry in China was a monopoly, there was no longer a market for our products.
On April 24, 2007, the Company entered into an Agreement on Transfer of Shares of Galaxy View with Liu Changqing and Wang Feng (collectively, the "Purchasers”) for the sale of our wholly-owned subsidiary Galaxy View (the “Agreement”). Changqing purchased a 60% interest and Feng will purchase a 40% interest in Galaxy View. In exchange for all of the outstanding shares of Galaxy View, the Purchasers agreed to pay $3,000,000 as consideration for the acquisition. We entered into promissory notes with the Purchasers for payment of their share of the $3,000,000 which was due within 90 days of April 24, 2007. If payment was not made within 90 days, the promissory notes will accrue interest at 18% from the closing date. As of December 31, 2007, the amount has been paid in full.
Acquisition of Anytone
On December 7, 2009, we closed the transactions contemplated by the share exchange agreement (the “Share Exchange Agreement”) dated November 19, 2009 with Anytone International and Anytone. Pursuant to the Share Exchange Agreement, we acquired Anytone International and thereby indirectly acquired Anytone International’s Chinese operating subsidiary Anytone. Pursuant to the Share Exchange Agreement, we issued to the shareholders of Anytone International, proportionally among the Anytone International Shareholders in accordance with their respective ownership interests in Anytone International immediately before the closing of the Share Exchange, an aggregate of 3,593,939 shares of our Common Stock with standard restrictive legend, and cash consideration of $10,000,000. As of December 31, 2009, $5,000,000 has been paid. The Company paid the remaining $5,000,000 before June 30, 2010.
Acquisition of NewPower
On December 11, 2009, we entered into a share exchange agreement (the “Share Exchange Agreement”) with NewPower, whereby NewPower would merge with and into E’Jenie. Pursuant to the Share Exchange Agreement, in exchange for all of the capital stock of NewPower, we agreed to issue to the shareholders of NewPower an aggregate of 1,823,346 shares of our Common Stock with standard restrictive legend and cash of $3,000,000. This transaction closed on January 12, 2010.
Acquisition of Kim Fai
On November 10, 2010, the Company’s subsidiary, Shenzhen Anytone, executed a share exchange agreement (the “Kim Fai Share Exchange Agreement”) to acquire all the equity interest of Kim Fai, a Chinese company engaged in the technology development and sale of solar application products and solar energy batteries ("Kim Fai"), with all of the shareholders of Kim Fai. The purchase price for 100% of the outstanding stock of Kim Fai was $24,000,000, of which $13,000,000 is to be paid in cash and $11,000,000 is to be paid in the form of shares of common stock of the Company. The purchase consideration is payable as follows: (i) $13,000,000 to be paid in cash within one year of the execution of the Agreement, and (ii) $11,000,000 to be paid in shares of restricted common stock of the Company within 3 days of the completion of the share exchange formalities with the local governmental authorities. Pursuant to the Kim Fai Share Exchange Agreement, such shares are to be issued with a per share price of $5.75 and amount to an aggregate of 1,913,265 shares of restricted common stock. However, in accordance with guidance FASB ASC 805-30-30-7 , the per share price is $7.84, the fair market value of the stock on the date the transaction under the Kim Fair Share Exchange Agreement closed, which was November 10, 2010. As of December 31, 2010, $6,529,286 has been paid and 1,913,265 shares have been issued.
Disposition of Billion, E’Jenie and NewPower
On November 24, 2011, the Company entered into an equity transfer agreement to transfer 100% of the equity interest of Billion, including its subsidiaries E’Jenie and NewPower, for a cash consideration of RMB 85,553,892.75 (approximately $13,549,443). On December 9, 2011, the transfer of the equity interest was completed and registered with the BVI authority.
Our Business
LITHIUM BATTERIES
Industry
The lithium battery was created in the 1990s, with its first mass production in 1993 in Japan. Lithium batteries were first used in notebook computers and now are used in cellular phones, video machines, laptops, digital cameras, MP3 players, global positioning satellite systems, 3G communication devices, hybrid cars and an array of other electronic products.
Batteries are becoming smaller, lighter, more efficient, longer lasting and free of pollution. The lithium battery's energy/weight ratio exceeds that of its counterparts and with an excellent safety standard we believe that it is the future of the battery industry. 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 that there will be even greater demand for lithium batteries in China and worldwide in the next few years. We believe that the current trend towards smaller, lighter portable consumer products will continue to grow and because of its size, the demand for the lithium battery will increase. By way of example, a mobile-phone battery has a typical usage life of 300 to 500 recharges, which translates to a ratio of 1.8 batteries in service life of each phone, according to official Chinese statistics. However, our internal data reveals that battery replacement demand is faster than this when consumers turn in their phones for new models before the normal life of the battery is over. A short product life, combined with a short product innovation cycle, result in rapid product turnover – and plenty of business for battery suppliers.
Mobile power is lithium ion batteries’ application products. Currently, more and more advanced portable consumer electronic products are introduced to the market, such as laptops, smartphones and tablet PCs. All of these high technology products consume a great amount of power. The original single lithium ion batteries are not enough to support these products. Mobile power is the solution. Mobile power appeared 8 years ago and became popular and competitive in the recent years. The increasing competition is due to 1) increased demand – many consumers have more than one portable consumer electronic devices and they need power support; 2) higher profits – compare to original lithium ion battery, mobile power is still a new product and have batter profit; 3) low technology limit – a mobile power includes three major components which are battery cell, PCB and case and based on the pioneers’ technologies, most of lithium ion battery related manufacturers can enter the market easily; 4) no industry standards – mobile power is still a new business in the lithium ion battery industry without official standards; 5) no protection for intelligent property - the counterfeit or exaggerate products are sold all over the market. However, we believe that this disorderly and competitive market is an inevitable stage during the development of the market. Once the consumers gather enough knowledge about these new products and the government establishes the official industry standards, those pioneering companies such as Anytone who has accumulated experiences with quality products will be the winners in the mobile power industry.
Currently, China has around 940 million mobile phone subscribers, more than the sum of the United States (“US”) and European subscribers. It is the country with the largest mobile market in the world. The mobile phone market in China is expected to maintain its growth, especially the market of smartphones.
China's smartphone market is projected to grow 94% from 52.2 million units in 2011 to 101.4 million units in 2012, according to a recent report by market research firm iSuppli. In addition, although the growing speed will start to moderate from next year, expansion will remain in the double digit until 2015, when shipment is estimated to be 188.4 million units in total.
Principal Products
Anytone
Anytone is an innovative company which integrates R&D and marketing functions in one entity. In addition, Anytone is the first company in China that engages in the development and distribution of portable mobile power products. These products are primarily used in portable consumer electronic devices, such as smartphones, digital cameras, digital camcorders, MP3 players, PMP, PDA, and PSP, to help to solve a common problem of these devices: the low capacity and un-changeability of their batteries.
Anytone's products combine aesthetics with technology. Anytone has acquired a total of 60 existing and pending patents from the State Intellectual Property Office of the PRC: 42 patents have been obtained for the appearance design of our products, with 2 additional applications pending, while 7 patents have been obtained for certain innovative utility models, with 8 additional applications pending and 1 pending application for the invention.
Anytone’s mobile power backup products include 4 major series as follows:
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Cell Phone Series. Through a universal connector, Anytone’s mobile power backup products can charge most major cell phones currently in the market. In addition, Anytone’s products support the “Made for iPhone, iPod and iPad” devices.
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Digital Camera and Camcorder Series. This series has a higher capacity to be used for digital cameras, camcorders and similar devices. This series of products also combines a universal connector which can support most major brand digital devices currently in the market.
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Solar Energy Series. As an environmentally friendly company, Anytone also provides green energy products through its solar energy series. These products recharge itself by absorbing solar energy through universal connectors to provide most digital devices currently in the market extra battery life.
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Laptop Series. This series has sufficient power capacity to support small digital mobile devices and the power needed by most of the laptops currently in the market.
Anytone’s mobile power backup products are primarily sold to end-users directly through its distribution channels’ retail networks under its own brand name in China and other counties through OEM. Anytone is one of the leading companies in the mobile power backup industry and has already established its brand reputation and market position in China.
Anytone produces a small amount of products for testing purposes. Its major production occurs by outsourcing to third parties’ facilities. Anytone’s advantages are in R&D and marketing. In addition, its products are focused on the end-users customers. Therefore, Anytone believes that through outsourcing its production, it can more focus on R&D and marketing to meet the end-user customers’ needs.
Kim Fai
Kim Fai primarily produces solar panels and other solar-related products such as solar lights, solar street lights, solar traffic lights, solar landscape lights, solar power system equipment and other solar related application products.
Kim Fai's major customers are solar construction and installation companies who need solar panels and other solar related application products to be used in construction.
Competition
The worldwide market for lithium batteries is highly competitive. We face competition from manufacturers not only within China but also from other parts of the world, particularly Japan, Taiwan, Malaysia, Indonesia, and Korea. We compete with these companies by striving to provide a higher quality product at a lower cost. For mobile power devices, Anytone’s primary competitors in domestic are Qunzan Technology (Shenzhen) Co., Ltd., Shenzhen Hali-Power Industrial Co., Ltd., Shenzhen Top Communications Co., Ltd., Shenzhen Yoobao Technology Co., Ltd., and Guangdong Pisen Electronics Co., Ltd. Anytone’s primary competitors in foreign are Mophie Inc., iGo Inc., Japan Trust Technology Inc., and Mizco International Inc. For solar products, Kim Fai's primary competitors in domestic are Sunworth Solar Energy Co., Ltd., Shenzhen Suoyang New Energy Co., Ltd., Changzhou EGing Photovoltaic technology Co., Ltd., Shenzhen J.G.N Solar-Energy Co., Ltd., Zhongshan Warsony Sci-Tech Industries Co., Ltd., Zhongshan Yong’an Road Lamp Co., Ltd., Shenzhen Unilumin Technology Co., Ltd., Shenzhen Topray Solar Co., Ltd., and Dongguan Gi-Power New Energy Co., Ltd. We believe that by doing business in China we enjoy competitive advantages over similar companies based elsewhere, such as abundant labor resources and low cost raw materials.
Manufacturing and Raw Materials
We purchase various battery components and raw materials for use in our manufacturing processes.
Anytone’s major products are mobile power devices of various models, each of which needs different components. These components include, but are not limited to, solar panels, solar batteries, PCB, Polymer batteries, lithium ion batteries, LCD, and LED emitters. In 2011, Anytone diversified its suppliers widely. The largest supplier if Anytone, Shenzhen Deli Battery Co., Ltd., who supplied batteries accounted for 5% of the Company’s total purchases in 2011. Compared to 2010, two of Anytone’s largest suppliers, Shenzhen Guanghaoyu Electronics Co., Ltd., which supplies solar panels and solar batteries, and Shenzhen BAK Battery Co., Ltd. which is Anytone’s largest supplier for PCB, Lithium battery, Polymer batteries, accounted for 10% and 9% of the Company’s total purchases in 2010, respectively.
Kim Fai's major products are solar traffic lights, landscape lights, solar panel and other related solar application products. These products need different components such as Mono-silicon, Poly-silicon and other solar related components. In 2011, the largest supplier of Kim Fai, Trony Solar Holdings Co., Ltd. who supplied silicon chips accounted for 8% of the Company’s total purchases. Due to the fact that Kim Fai was acquired in November of 2010, its purchases from its suppliers accounted for small percentage of our total purchases. In 2010, the largest supplier, Guangzhou Sumyok Solar Power Technology Co., Ltd. which provided Poly-silicon to Kim Fai, accounted for just 2% of the Company’s total purchases.
We disposed two of our subsidiaries, E’Jenie and NewPower in the November of 2011. Before being disposed of, in 2011, E’Jenie switched its finished battery pack business with NewPower’s battery cell business. As a result, two largest suppliers, Shenzhen Beiterui New Energy Material Co., Ltd. and Shenzhen Xinchongkai Technology Co., Ltd., accounted for 8% and 6% of the Company’s total purchases in 2011. The principal raw materials we purchased from these two suppliers for E’Jenie are LiCoO2, LiMn2O4 and electrolytes which were used for finished battery packs’ production. In 2010, the primary raw materials E’Jenie purchased for our battery shell and cover segment are aluminum and steel. The largest supplier for this segment was Shenzhen Yibao Tech. Co., Ltd. which accounted for 3% of our total purchases in 2010. In addition, for the batteries’ assembly and finished battery distribution business which we launched in August 2008, we also purchased battery components such as battery cells, packaging labels and other components from a number of suppliers. In 2010, our two major suppliers are Shenzhen NewPower Technology Co., Ltd., Shenzhen Handian Battery Materials Co., Ltd. and Shenzhen Huayi Aluminum Products Co., Ltd., which accounted for 10% and 6% of our total purchases, respectively. As a result of our acquisition of NewPower, NewPower became one of our principal suppliers. The sales from NewPower to E’Jenie and Anytone was eliminated in the Company’s consolidated financial statements.
NewPower switched its battery cells business with E’Jenie’s finished battery pack business in the beginning of 2011. As a result, the major raw materials which NewPower purchased for its finished battery pack business are battery cells. E’Jenie became NewPower’s major supplier who accounted for 26% of the Company’s total purchases in 2011. In 2010, NewPower’s major products are battery cells and batteries which need different components, including lithium cobalt oxide, lithium manganese oxide, electrolyte, copper, battery shells, battery caps and other components. Since NewPower was acquired by the Company in January of 2010, two of NewPower’s largest suppliers, Shenzhen Beiterui New Energy Material Co., Ltd. which supplies lithium cobalt oxide and lithium manganese oxide, and Shenzhen Xinchongkai Technology Co., Ltd. which supplies electrolyte, accounted for 10% and 6% of the Company’s total purchases in 2010, respectively.
Overall, due to the switch of business, our suppliers’ structure, including our internal supplier, has changed in 2011. Shenzhen E’Jenie Science and Technology Development Co., Ltd., Trony Solar Holdings Co., Ltd., BTR New Energy Materials Co., Ltd., Shenzhen Xinchongkai Technology Co., Ltd. and Shenzhen Deli Battery Co., Ltd. are the Company’s five largest suppliers during 2011 which accounted for 26%, 8%, 8%, 6% and 5%, respectively. Compared to 2010, Shenzhen Guanghaoyu Electronics Co., Ltd., Shenzhen BAK Battery Co., Ltd., Shenzhen Beiterui New Energy Material Co., Ltd., and Shenzhen NewPower Technology Co., Ltd. which in the aggregate amount accounted for approximately 47% of all components and raw materials purchased. Each of these suppliers accounted for more than 10% of our total purchases in 2010.
CEO BACKGROUND
Weihe Yu has served as the Chairman of our Board of Directors since December 10, 2009. Mr. Yu has a bachelor’s degree in Mechanical Engineering. Mr. Yu’s strength is in R&D but also has great leadership ability. He has worked in the lithium ion battery industry for more than 10 years. Before he was appointed as Chairman of New Energy Systems Group, he was the cofounder of Shenzhen Anytone Technology Co., Ltd. From July 2005 to December 2009, he served as Anytone’s CEO and led Anytone to become the leading company in the portable mobile power industry during this period. Before that, he served as general manager of Shenzhen Four Images Industrial Co., Ltd. This company was committed to the development and sale of the protection circuit of lithium ion batteries. Mr. Yu also previously served as marketing director, manager assistant, and vice general manager in Yangxin Aluminum Wheel Co., Ltd from July 1998 to December 2000. He created a comprehensive marketing management system and performance appraisal system which improved the company’s performance dramatically.
Elan Yaish has been serving as our director since June 11, 2010. Mr. Yaish is the president of ERS Associates, Ltd. He provides business and financial advisory services to publicly traded and privately held companies including capital raising, strategic planning, M&A, SEC reporting and compliance and stock exchange transactions. From June 2010, he has also been serving as CFO of RF Dynamics, Ltd. From 2002 to 2005, Mr. Yaish was the CFO, VP of Finance and Assistant Secretary in Manchester Technologies, Inc. He implemented strategic planning initiatives while actively working with the company’s CEO and Board of Directors to maximize shareholder value. He directed Sarbanes-Oxley and all SEC reporting and filing requirements. In addition, he prepared the budget, negotiated the company’s line of credit and directed all areas of investor relations. From 2000 to 2002, Mr. Yaish was the assistant VP of Finance at Comverse Technology, Inc. He managed all SEC reporting and filings for the company with over 50 subsidiaries worldwide. From 1996 to 2000, Mr. Yaish was the VP of Finance and Controller at Trans-Resources, Inc. He managed accounting finance, SEC reporting and filings for the company. From 1992 to 1996, Mr. Yaish was a senior accountant at Deloitte and Touche LLP. Mr. Yaish currently serves as a director of US China Mining Group, Inc. Mr. Yaish received his Bachelor of Science in Accounting from Yeshiva University Sy Syms School of Business in 1992. Mr. Yaish is a licensed CPA in New York and a member of the AICPA and NYSSCPA. Mr. Yaish’s knowledge of U.S. GAAP and SEC reporting requirements and experience as an accountant led to the conclusion that he should serve on the Board of Directors, given the Company’s business and structure.
Shuxian Cui has been serving as our director since June 9, 2010. Since 1992, Ms. Cui has been in partial retirement as an auditor in various real estate companies and accounting firms in Shenzhen, China. From 1987 to 1992, Ms. Cui worked as an accountant in the financial section of Jiangxi Province Mining Bureau. She has previously also worked in financial departments for large state-owned companies such as Jiangxi Province 719 Mining, Hunan Province 712 Mining, Jilin Province Coal Authority, and Heilongjiang Province Coal Construction Authority. Ms. Cui holds a Junior College degree in accounting from Jilin University of Finance and Economics.
Li Liu has been serving as our director since May 18, 2010. Since August 2008 served as General Manager of Shenzhen Everstar Technology Co., Ltd., a Chinese company engaged in the design and manufacture of electronic multimedia electronic products. From January 2007 through July 2008, he served as technical director to Shenzhen ASA Industry Co., Ltd., one of the largest DVD loader R&D and manufacturing companies in the world. From August 2004 to December 2005, Mr. Liu served as a founding member of Shenzhen Techno Technology Development Co., Ltd., a technical design firm. Prior to that, Mr. Liu worked for eight years as engineer, senior software engineer, application technology manager (Recorder team) the Shenzhen branch of the Silicon Valley-based ESS Technology, Inc. Mr. Liu is a graduate of Southeast University with a bachelor’s degree in engineering and graduated with a master’s degree in business administration from Wuhan University. Mr. Liu’s business and financial knowledge and experience led to the conclusion that he should serve on the Board of Directors, given the Company’s business and structure.
The Board believes that each of the Company’s director-nominees is highly qualified to serve as a member of the Board. Each of the director-nominees has contributed to the mix of skills, core competencies and qualifications of the Board. When evaluating candidates for election to the Board, the Nominating Committee seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, leadership skills. Our director-nominees are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.
MANAGEMENT DISCUSSION FROM LATEST 10K
BUSINESS OVERVIEW
We operate our business through our wholly-owned subsidiaries, E'Jenie Technology Development Co., Ltd. ("E'Jenie"), Shenzhen Anytone Technology Co., Ltd. ("Shenzhen Anytone"), Shenzhen NewPower Technology Co., Ltd. ("NewPower"), 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 shells and related products primarily in China. Based on customer specifications, E'Jenie develops, customizes and produces steel and aluminum battery shells and caps. We manufacture and distribute battery shells and covers for cellular phones. We maintain long-term relationships with large lithium battery manufacturers. We believe we will continue to receive orders from our customers because of our reputation and the quality of our products. Our professional marketing team maintains relationships with our current customers and at the same time searches for potential new customers. We seek to maintain and strengthen our position as a provider of battery shells and caps while increasing the breadth of our product line and improving the quality of our products.
In August 2008, under the current 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.
The 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. The lithium battery energy/weight ratio exceeds its counterparts and with an excellent safety standard we believe it is the future of the battery industry. 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.
Having engaged in the battery business for years, management of the Company has accumulated abundant knowledge about the battery industry, established a strong network among battery companies which are both upstream and downstream in the battery distribution flow, and gained a lot of experience in battery distribution; therefore, we believe the Company is in a more favorable position than other companies in distributing finished batteries. Assembling and distributing finished batteries has a higher profit margin than manufacturing battery accessories, so management of the Company is confident 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 (H.K.) 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 development and market our branded mobile power and related power backup devices. Shenzhen Anytone was founded in 2005 and has very strong ability in R&D and marketing. In addition, Anytone has built its branded name in China and its products are sold to the end consumers directly. By focusing on R&D and marketing, Anytone only produces some sample products in-house for testing and majorly outsourcing its production to the third parties who are certified by Anytone.
Mobile power is lithium ion batteries’ application products. Currently, more and more advanced portable consumer electronic products are introduced to the market, such as laptop, smartphones, tablet PC and etc. All of these high technology products and the functions they have are power consuming monsters. The original single lithium ion battery is not enough to support these products. Mobile power is the solution to feed these power consuming monsters. Compare to the creation of lithium ion battery was in the 1990s, mobile power was started around 10 years ago and became popular and competitive in the recent few years. The increasing competition is due to 1) increasing demand – many consumers have more than one portable consumer electronic devices and they need power support; 2) higher profits – mobile powers are sold to end consumers directly; 3) low technology limit – a mobile power includes three major components which are battery cell, PCB and case. Therefore, most of lithium ion battery related manufacturers can enter easily; 4) no industry standards – mobile power is still a new business in the lithium ion battery industry without official standards. Therefore, this market is very disorder and the counterfeit or exaggerate products are sold all over the market. However, we believed that this market is still at the early stage. Once the 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 all the equity interest of Kim Fai, a Chinese company engaged in the technology development and sale of solar application products and solar energy batteries, with all of the shareholders of Kim Fai. The price for the outstanding stock of Kim Fai was $13,303,236 to be 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 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 RMB 85,553,892 ($13,578,043). The selling price equals the appraised value of Billion Electronics, including its wholly owned subsidiaries Shenzhen E’Jenie and Shenzhen NewPower less RMB 153,033,107 ($24,287,500) of debt that the Company owes 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 February 28, 2012, the Company received RMB 22,906,779 ($3,635,477) and had an outstanding receivable of RMB 62,647,114 ($9,942,556).
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. The DCF method uses revenue and expense projections and risk-adjusted discount rates. The process of determining fair value is subjective and requires management to exercise a significant amount of 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 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 fair value 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 pricefrom other manufacturers. The Company concluded that 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 has not recorded a corresponding tax benefit in 2011. On December 9, 2011, the Company fully disposed its subsidiaries Billion, E’jenie and NewPower.
As of December 31, 2011, the Company concluded there was no impairment to the goodwill for Kim Fai reporting unit after performing the step one analysis by using the discounted cash flow method with each reporting unit’s fair value greater than the carrying value including the goodwill.
Net Sales
Net sales for 2011 was for $51.51 million, compared to $45.61 million for 2010, an increase of $5.90 million or 13%. The increase was primarily due to the acquisition of Kim Fai in November 2010, which brought us $20.23 million in solar panel sales during the year of 2011 compared to $3.09 million for 2010 after the acquisition. Battery production and sales, mainly from Anytone was $31.29 million in 2011 compared to $42.52 million in year 2010, a decrease of $11.23 million or 26%. The decrease was mainly due to (1) the entire battery industry being depressed in China, (2) we integrated the business section in each subsidiary, and as a result, reduced the production and sales of batteries and battery shells and covers; and (3) we decreased certain products’ selling prices to remain competitive and keep the market share.
On December 9, 2011, we completed the sale of E’Jenie and NewPower. The sale of E’Jenie and NewPower was separately disclosed as discontinued operations, amounted to $14,383,844 and $9,116,659 for 2011 and 2010, respectively.
Cost of Sales
Cost of Sales ("COS") for the year ended December 31, 2011 was $39.78 million, or 77% of net sales, compared to $32.76 million, or 72% of net sales, for 2010, an increase of $7.02 million, or 21%.
COS for the battery segment was $23.19 million, or 74% of total battery revenue, for 2011, compared to $30.66 million, or 72%, for 2010, a decrease of $7.46 million, or 24%. The percentage increase in COS was mainly due to the decrease of production and sales volume, due to the depressed whole industry.
COS for our new production line of solar products for 2011 was $16.59 million, or 82% of sales, compared to $2.10 million for 2010, or 68% of sales. The increase in our percentage COS for solar products resulted from increased sales and production volume but with increasing cost as a result of increase material prices in China.
Operating Expenses
Operating expenses for 2011 were $14.24 million, or 28% of net revenue, compared to $5.46 million, or 12% of net revenue, for 2010, an increase of $8.78 million, or 161%. The increase in operating expenses was primarily due to the goodwill impairment which is $7.41 million and the operating expenses from our newly acquired subsidiary, which resulted in an increase of $0.95 million in operating expenses.
Selling expenses for 2011 were $1.28 million, or 3% of net revenue, compared to $0.22 million, or 0.48% of net revenue, for 2010, an increase of $1.07 million, or 490%, which was mainly due to the increased marketing expense including $0.44 million of advertisement, $0.14 million of exhibition fees and shipping cost, and $0.19 million of salary of sales personnel as a result of our efforts to expand the market for new customers and $0.28 million from Kim Fai which acquired in October 2010.
General and administrative expenses for 2011 were $5.55 million, or 11% of net revenue, compared to $5.24 million, or 11% of net revenue, for 2010. The increase in general and administrative expenses of $0.30 million was mainly due to our newly acquired subsidiary Kim Fai, which increased general and administrative expenses by $0.67 million. In addition, the Company increased product development cost of $0.27 million and product design fee of $0.02 million, employees’ salary and welfare of $0.32 million, travel of $0.02 million, amortization expense of $0.09 million and other expenses of $0.02 million, partially offset by the decreased expenses of US Parent Company for 2011.
For 2011 and 2010, the US Parent Company recorded $0.11 million and $1.00 million as stock option and warrant compensation to the Company’s Investor Relationship (“IR”) and independent director. The stock-based compensation to the consultants of the Company was $0.68 million for both 2011 and 2010. Those consultants who were granted stock as compensation for work as branding strategy and financial consultants. The branding strategy consultants help the Company conduct stage analysis in the development of products and the industry; analyze customers’ motive of purchase; analyze market segmentation of similar brands; set strategic models and develop principles of the Company’s self-owned brands; assist the Company in identifying target consumers and designing brand development strategy; advise the Company on implementation of brand strategy including brand recognition, packaging, advertisement, etc. and draft brand strategy planning reports. The financial consultants provide the Company advice on matters including: mergers and acquisitions (“M&A”), management buy-outs (“MBO”), restructuring, asset management, investment and financing.
During 2011, the Company performed goodwill impairment test and determined $7.41 million impairment to goodwill of Anytone.
Income (loss) From Discontinued Operations, net of tax
Net loss from discontinued operations, net of tax for 2011 was $14.38 million compared net income of $9.12 million for 2010, a decrease in net income of $23.50 million, which was mainly due to the goodwill impairment of $14.31 million of NewPower and operation loss of $0.07 million from disposed E’Jenie and NewPower.
Net Income (loss)
Net loss for 2011 was $17.86 million compared to net income of $14.32 million for 2010, a decrease in net income of $32.19 million, or 258%, due to the reasons listed above.
In 2011, the sale of Billion, E’Jenie and NewPower brought the Company a disposal gain of $0.29 million.
In addition, on November 9, 2011, NewPower was served notice of a lawsuit filed in Longgang District People’s Court in Shenzhen, China on October 24, 2011. In the complaint filed in the lawsuit, SZIT alleges NewPower breached a Sales Agreement, dated May 9, 2011 between NewPower and SZIT, by not accepting returns of purported faulty products. The plaintiff has claimed a full credit for $1.66 million (RMB 10.56 million) of sales, of which, $1.15 million (RMB 7.34 million) was for products shipped prior to September 30, 2011 and $0.51 million (RMB 3.24 million) was shipped after September 30, 2011. In addition, the plaintiff is seeking damages of $0.31 million (RMB 2.00 million) for the loss incurred from faulty products.
On December 7, NewPower entered into a settlement agreement with SZIT resolving the action. Pursuant to the Settlement Agreement, SZIT shall return certain products it purchased under a sales agreement, dated May 9, 2011 between NewPower and SZIT. NewPower shall return RMB 9,720,000 ($1,542,636), the purchase price of the products, and pay damage compensation of RMB 1,000,000 to SZIT. The Sales Agreement shall be terminated immediately and SZIT releases any and all of its claims arising out of the Sales Agreement.
Related Party Loans
As of December 31, 2011, the Company had a $571,347 unsecured, due on demand, and non-interest bearing loans payable to Dongrong Xu and Zaoxian Fang, the original owners of Shenzhen Anytone, of $485,645 and $85,702, respectively, in connection with the acquisition of Shenzhen Anytone by Anytone International.
Working Capital Requirements
Historically, cash from operations, short term financing and the sale of our Company stock have been sufficient to meet our cash needs. We believe we will be able to generate sufficient cash from operations to meet our working capital needs. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by economic environment for the industry and opportunities and availability of financing and raising capital by selling stock.
OFF-BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt of other entities or entered into any options on non-financial assets.
Critical Accounting Policies
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.
Basis of Presentation
The accompanying consolidated financial statements were prepared in conformity with generally accepted accounting principle in the United States (“US GAAP”). The Company’s functional currency is the Chinese Yuan Renminbi (“CNY” or “RMB”); however the accompanying consolidated financial statements were translated and presented in United States Dollars (“$” or “USD”).
Principles of Consolidation
The consolidated financial statements include the accounts of New Energy Systems Group and its wholly owned subsidiaries Billion, E’Jenie, Anytone, Kim Fai and NewPower, are collectively referred to the Company. Billion, E’Jenie and NewPower were disposed on December 9, 2011. All material intercompany accounts, transactions and profits were eliminated in consolidation.
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.
Revenue Recognition
The Company manufactures and distributes batteries, battery shells and covers for portable consumer electronic devices in the PRC. The Company’s revenue recognition policies are in compliance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, delivery is complete, 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 gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.
Recent Accounting Pronouncement
In September 2011, FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (ASC Topic 350): Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. ASU No. 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income. Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently assessing the effect that the adoption of this pronouncement will have on its financial statements.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
BUSINESS OVERVIEW
We operate our business through our wholly-owned subsidiariesShenzhen 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 professional marketing team maintains relationships with our current customers and at the same time 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 increasing the breadth of our product line and improving 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.
The 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. The lithium battery energy/weight ratio exceeds its counterparts and with an excellent safety standard we believe it is the future of the battery industry. 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.
Having engaged in the battery business for years, management of the Company has accumulated abundant knowledge about the battery industry, established a strong 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 very strong ability in R&D and marketing. In addition, Anytone has built its branded name in China and its products are sold to the 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 certified third parties.
Mobile power units are lithium ion batteries’ application product. 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 very unorganized and is in disorder with counterfeit or exaggerated products sold in the marketplace. However, we believe that this market is still in its early stage. Once the 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 all the equity interest of Kim Fai, a Chinese company engaged in the technology development and sale of solar application products and solar energy batteries, with all of the shareholders of Kim Fai. The price for the outstanding stock of Kim Fai was $13,303,236 to be 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 owes 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 April 30, 2012, the Company received RMB 29,780,733 ($4,731,381) and had outstanding receivable of RMB 55,773,160 ($8,860,900)..
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 FV. The Discounted Cash Flow (“DCF”) method uses revenue and expense projections and risk-adjusted discount rates. The process of determining fair value is subjective and requires management to exercise a significant amount of 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 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 has not recorded a corresponding tax benefit in 2011. On December 9, 2011, the Company disposed its subsidiaries Billion, E’jenie and NewPower. As of March 31, 2012, the Company concluded there was no impairment to the goodwill for the Anytone and Kim Fai reporting units.
Net Sales
Net sales for the three months ended March 31, 2012 was $4.96 million, compared to $12.48 million for the comparable period of 2011, a decrease of $7.52 million or 60%. Battery production and sales, mainly from Anytone, was $3.0 million for the three months ended March 31, 2012 compared to $6.97 million in the comparable period of 2011, a decrease of $3.97 million or 57%. Sales of solar products was $1.96 million in the three months ended March 31, 2012, compared to $5.51 million in the comparable period of 2011, a decrease of $3.55 million or 64%. The decrease was mainly due to (1) the battery industry being depressed in China; (2) integration of the business section, resulting in reduced production and sales of batteries, compare to the three months ended March 31, 2011, the overall sales volume decreased 62% in 2012.
Cost of Sales
Cost of Sales ("COS") for the three months ended March 31, 2012 was $4.74 million, compared to $7.16 million for the comparable period of 2011, a decrease of $2.42 million, or 34% due to decreased sales and production volume.
COS for the battery segment was $2.88 million, or 96% of total battery revenue, for the three months ended March 31, 2012, compared to $3.28 million, or 47%, for the comparable period of 2011, a decrease of $0.4 million, or 12%.
COS for solar products for the three months ended March 31, 2012 was $1.86 million, or 95% of solar products sales, compared to $3.88 million for the comparable period of 2011, or 70% of sales, a decrease of $2.02 million, or 52%.
The decrease on total cost of sales was due to decreased sales and production volume. The percentage increase for COS to sales was mainly due to the increase of labor cost and the increase in price of certain raw materials, as well as decreased production and sales volume, therefore the fixed overhead cost absorbed by products increased in the three months ended March 31, 2012 compared to the comparable period of 2011. We adjusted our employees’ salary as a result of overall inflation in China especially for our workshop workers, their base salary increased 15% in 2012 compared to the Comparable period of 2011.
Operating Expenses
Operating expenses for the three months ended March 31, 2012 were $2.06 million, or 42% of net revenue, compared to $1.70 million, or 14% of net revenue, for the comparable period of 2011, an increase of $0.36 million, or 21%.
Selling expenses for the three months ended March 31, 2012 were $0.40 million, or 8% of net revenue, compared to $0.32 million, or 3% of net revenue, for the comparable period of 2011, an increase of $0.08 million, or 23%, which was mainly due to the increased marketing expenses including $0.07 million of advertisement and promotional expenses and $0.04 million of exhibition fees.
General and administrative (“G&A”) expenses for the three months ended March 31, 2012 were $1.67 million, or 34% of net revenue, compared to $1.38 million, or 11% of net revenue, for the comparable period of 2011. The increase in G&A expenses of $0.29 million was mainly due to the increase of $0.37 million of employees’ salary and welfare expenses. For the three months ended March 31, 2012 and 2011, the US Parent Company recorded $0.39 million and $0.49 million as G&A expenses, respectively. These expenses mainly included stock option and warrant compensation expense and certain expenses relating in being public in the USA including accounting and legal fees.
Income From Discontinued Operations, net of tax
Net income from discontinued operations, net of tax for the three months ended March 31, 2012 was $0 compared to $2.82 million for the comparable period of 2011, which was mainly due to the disposed subsidiaries, NewPower and E’Jenie.
Net Income (Loss)
Net loss for the three months ended March 31, 2012 was $1.65 million compared to net income of $5.46 million for the comparable period of 2011, a decrease of $7.11 million, or 130%, due to the reasons listed above.
Related Party Loans
As of March 31, 2012, the Company had no related party loans. As of December 31, 2011, the Company had a $571,347 unsecured, due on demand, and non-interest bearing loans payable to Dongrong Xu and Zaoxian Fang, the original owners of Shenzhen Anytone, of $485,645 and $85,702, respectively, in connection with the acquisition of Shenzhen Anytone by Anytone International.
Working Capital Requirements
Historically, cash from operations, short term financing and the sale of our Company stock have been sufficient to meet our cash needs. We believe we will be able to generate sufficient cash from operations to meet our working capital needs. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by economic environment for the industry and opportunities and availability of financing and raising capital by selling stock.
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.
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 March 31, 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 affirmative 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.
Critical Accounting Policies
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.
Basis of Presentation
The accompanying consolidated financial statements were prepared in conformity with generally accepted accounting principle in the United States (“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”).
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 the Company. All material intercompany accounts, transactions and profits were eliminated in consolidation.
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.
Revenue Recognition
The Company manufactures and distributes batteries, battery shells and covers for portable consumer electronic devices in the PRC. The Company’s revenue recognition policies are in compliance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 605). Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, delivery is complete, 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 gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the finished product. The Company records VAT payable and VAT receivable net of payments in the financial statements. The VAT tax return is filed offsetting the payables against the receivables. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government.
Recent Accounting Pronouncement
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is adopted for fiscal years, and interim periods beginning after December 15, 2011 for public entities with retrospective application. There was no material impact on our consolidated financial statements upon adoption.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. There was no material impact on our consolidated financial statements upon adoption.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. ASU No. 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted this ASU beginning with its Quarterly Report on Form 10-Q for the three months ended March 31, 2012. There was no material impact on our consolidated financial statements upon adoption.
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Fund Letters
