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EX-31.2 - China Lithium Technologies Inc.v223809_ex31-2.htm
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EX-31.1 - China Lithium Technologies Inc.v223809_ex31-1.htm
United States
 Securities and Exchange Commission
 Washington, D.C. 20549

 FORM 10-Q/A
 (Amendment No. 2)
 
o
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR
 
OR

x
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010
 
Commission File No: 000-53263

 CHINA LITHIUM TECHNOLOGIES, INC.
 (Exact name of registrant as specified in its charter)

NEVADA
 
41-1559888
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer ID No)

15 West 39th Street Suite 14B, New York, NY 10018
 (Address of principal executive office) (Zip Code)

 Registrant's telephone number:  212-391-2688
 
 

 Former name, former address and former fiscal year,
 (if changed since last report)

               Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 o 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 definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting companyx
       
(Do not check if a smaller
 reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of shares of common stock, $0.001 par value per share, outstanding as of February 15, 2011 was 21,659,811.

Amendment No. 1
 
This amendment is being filed in order to restate the financial statements for the reasons set forth in Note 15 to the Financial Statements.  Changes have also been made to the Notes to Financial Statements for the sake of clarity.

No effort has been made to update the disclosure, nor has any other aspect of the disclosures been modified.  For current information regarding the Company, the reader should refer to the recent filings by the Company with the Securities and Exchange Commission.
 
 
 

 
 
CHINA LITHIUM TECHNOLOGIES, INC.
 QUARTERLY REPORT ON FORM 10-Q/A
 FOR THE PERIOD ENDED DECEMBER 31, 2010

 INDEX
TABLE OF CONTENTS
 
       
Page
   
PART I - FINANCIAL INFORMATION
   
         
Item 1:
 
Financial Statements
 
2
         
Item 2:
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
22
         
Item 3:
 
Quantitative and Qualitative Disclosures About Market Risk
 
27
         
Item 4:
 
Controls and Procedures
 
27
         
   
PART II - OTHER INFORMATION
   
         
Item 1:
 
Legal Proceedings
 
28
         
Item 1A:
 
Risk Factors
 
28
         
Item 2:
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
28
         
Item 3:
 
Defaults Upon Senior Securities
 
28
         
Item 4:
 
Removed and Reserved
 
28
         
Item 5:
 
Other Information
 
28
         
Item 6:
 
Exhibits
 
28

 
1

 

Item 1: Financial Statements
 
CHINA LITHIUM TECHNOLOGIES, INC

 FOR THE PERIOD ENDED DECEMBER 31, 2010

   
PAGE
FINANCIAL STATEMENTS:
   
     
             BALANCE SHEETS
 
3 - 4
             STATEMENTS OF INCOME
 
5
             STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY
 
6
             STATEMENTS OF CASH FLOWS
 
7 & 8
     
NOTES TO FINANCIAL STATEMENTS
 
9 - 21

 
2

 
 
CHINA LITHIUM TECHNOLOGIES, INC.
 
CONSOLIDATED BALANCE SHEETS

ASSETS
 
December 31,
2010
   
June 30,
2010
 
   
(Restated, Unaudited)
       
Current Assets:
           
Cash and Cash Equivalents
  $ 2,944,769     $ 2,761,427  
Accounts Receivable
    4,924,419       4,054,189  
Other Receivable
    57,127       48,621  
Advanced to Suppliers
    22,449       12,297  
Inventory
    1,222,202       786,013  
Prepaid Expenses
    77,903       68,169  
                 
Total Current Assets
    9,248,869       7,730,716  
                 
                 
Plant & Equipment, net
    358,912       261,811  
Patent and Other Intangibles, net
    71,966       72,907  
 
               
Total Assets
    9,679,747       8,065,434  
 
“Continued on next page”
 
“The accompanying notes are an integral part of these financial statements”
 
 
3

 
 
CHINA LITHIUM TECHNOLOGIES, INC.
 
CONSOLIDATED BALANCE SHEETS
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
December 31,
2010
   
June 30,
2010
 
   
(Restated, Unaudited)
       
Current Liabilities:
           
Accounts Payable
    1,437,184       1,832,512  
Advance from Customers
    3,429       3,329  
Payroll Payable
    64,854       57,186  
Tax Payable
    420,038       310,989  
Other Payable
    4,912       4,495  
Accrued Expenses
    46,420       45,074  
Loan from Shareholders
    133,407       83,492  
Warranty Accrual
    290,603       237,374  
Total Current Liabilities
    2,400,847       2,574,452  
Total Liabilities
    2,400,847       2,574,452  
                 
Stockholders' Equity:
               
Preferred Stock,  par value $0.001, 20,000,000 shares authorized, 0 share issued and outstanding as of June 30 and December 31, 2010
    -       -  
Common Stock, par value $0.001, 783,000,000 shares authorized; 20,159,811 shares issued and outstanding as of June 30, 2010, 21,659,811 shares issued and outstanding, including 1,500,000 unvested restricted stock award as of December 31, 2010
    21,659       20,159  
Additional Paid in Capital
    1,158,656       252,771  
Reserved Funds
    467,186       467,186  
Accumulated Other Comprehensive Income
    300,563       98,594  
Retained Earnings
    5,330,835       4,652,272  
Total Stockholders' Equity
    7,278,899       5,490,982  
                 
Total Liabilities and Stockholders' Equity
  $ 9,679,747     $ 8,065,434  
 
“The accompanying notes are an integral part of these financial statements”
 
 
4

 
 
CHINA LITHIUM TECHNOLOGIES, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
(UNAUDITED)
 
   
Three Months Ended
December 31
   
Six Months Ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
   
(Restated)
         
(Restated)
       
Revenues
  $ 4,268,090     $ 3,505,473     $ 7,972,767     $ 7,428,519  
Cost of Goods Sold
    2,766,523       2,294,508       5,167,177       5,214,539  
                                 
Gross Profit
    1,501,566       1,210,965       2,805,590       2,213,980  
                                 
Operating Expenses:
                               
Manufacturing Expenses
  $ 54,350     $ 66,356     $ 116,835     $ 93,257  
R & D Expenses
    19,675       20,615       39,995       31,330  
Sales Expenses
    134,882       68,843       384,736       134,543  
General and Administrative Expenses
    203,226       150,887       1,048,605       280,404  
                                 
Total Operating Expenses
    412,133       306,701       1,590,171       539,535  
                                 
Income from Operations before Other Income and (Expenses)
    1,089,434       904,264       1,215,419       1,674,446  
                                 
Other Expense and (Income):
                               
Financial Expenses (Income)
    (8,127 )     -       (11,631 )     229  
Other Expenses (Income)
    (771 )     (53 )     (590 )     (1,252 )
Total Other Expense and (Income)
    (8,898 )     (53 )     (12,220 )     (1,023 )
                                 
Income before Income Taxes
    1,098,332       904,317       1,227,639       1,675,469  
                                 
Provision for Income Taxes
    333,028       226,718       549,076       419,506  
                                 
Net Income
    765,304       677,599       678,563       1,255,963  
                                 
Other Comprehensive Income:
                               
Unrealized Gain (loss) on Foreign Currency Translation
    103,284       139       201,969       35,562  
                                 
Comprehensive Income
  $ 868,588     $ 677,739     $ 880,532     $ 1,291,525  
                                 
Earnings Per Common Share-Basic and Diluted
  $ 0.04     $ 0.03     $ 0.08     $ 0.06  
                                 
Weighted Average Common Shares-Basic and Diluted
    20,159,811       20,159,811       20,159,811       20,159,811  
 
“The accompanying notes are an integral part of these financial statements”
 
 
5

 
 
CHINA LITHIUM TECHNOLOGIES, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
(UNAUDITED)
 
                            Additional
Paid in
Capital
    Accumulated
Other
Comprehensive Income
     Retained Earnings      Reserved FundsA      Comprehensive Income     Total
Stockholders' Equity
 
   
Preferred Stock
    Common Stock                          
    Shares     Amount    
Shares
    Amount                          
Balance- June 30, 2008
    -     $ -       -     $ -     $ -     $ 63,394     $ 967,804     $ -           $ 1,031,198  
                                                                               
Issuance of common stock
                    1,007,936       1,008       157,436                                     158,444  
Net income
                                                    1,722,687               1,722,687       1,722,687  
Retained earning to reserved funds
                                                    -       -                  
Foreign currency translation gain
                                            7,993                       7,993       7,993  
Comprehensive income
                                                                    1,730,680          
Balance - June 30, 2009 (Restated)
    -     $ -       1,007,936     $ 1,008     $ 157,436     $ 71,387     $ 2,690,491     $ -             $ 2,920,323  
                                                                                 
Issue of common stock
                    19,151,875       19,151       95,335                                       114,486  
Net income for the year
                                                    2,428,966               2,428,966       2,428,966  
Retained earning to reserved funds
                                                    (467,186 )     467,186                  
Foreign currency translation gain
                                            27,207                       27,207       27,207  
Comprehensive Income
                                                                    2,456,173          
Balance - June 30, 2010 (Restated)
    -     $ -       20,159,811     $ 20,159     $ 252,771     $ 98,594     $ 4,652,271     $ 467,186             $ 5,490,982  
                                                                                 
Common stock compensation on September 2, 2010
                                    717,000                                       717,000  
Restricted common stock issued to employees
                    1,500,000       1,500       1,648,500                                       1,650,000  
Deferred stock-based compensation expense
                                    (1,459,615 )                                     (1,459,615 )
Net income for the six months
                                                    678,563               678,563       678,563  
Foreign currency translation gain
                                            201,969                       201,969       201,969  
Comprehensive Income
                                                                    880,532          
Balance - December 31, 2010 (Restated, Unaudited)
    -     $ -       21,659,811     $ 21,659     $ 1,158,656     $ 300,563     $ 5,330,835     $ 467,186             $ 7,278,899  
 
Footnote A (Reserved Funds): Restrictived retained earnings for the benefit of empoyees
 
“The accompanying notes are an integral part of these financial statements”
 
 
6

 
 
CHINA LITHIUM TECHNOLOGIES, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)

   
Six Months Ended
December 31,
 
Cash Flows From Operating Activities:
 
2010
   
2009
 
   
(Restated)
       
Net Income
  $ 678,563     $ 1,255,963  
Adjustments to Reconcile Net Income to Net Cash
               
     Provided (Used) By Operating Activities:
               
     Depreciation and Amortization Expense
    42,264       41,934  
     Stock-based Compensation Expense
    717,000       -  
     Amortization of Stock-based Compensation Expense
    190,385       -  
(Increase) or Decrease in Current Assets:
               
     Accounts Receivable
    (870,229 )     (1,816,698 )
     Inventories
    (436,189 )     1,272,912  
     Prepaid Expenses
    (9,734 )     33,266  
     Advanced to Suppliers
    (10,152 )     (12,066 )
     Other Accounts Receivables
    (8,506 )     (22,250 )
Increase or (Decrease) in Current Liabilities:
               
     Accounts Payable
    (395,327 )     121,892  
     Advance from Customers
    99       (1,110 )
     Taxes Payable
    109,048       115,292  
     Payroll Payable
    7,668       18,792  
     Interest Payable
    -       (32,732 )
     Warranty Accrual
    53,229       33,079  
     Other Account Payable
    417       (117,217 )
     Accrued Expenses and Other Payables
    1,346       41  
                 
Net Cash (Used) Provided by Operating Activities
    69,882       891,097  
                 
Cash Flows From Investing Activities:
               
                 
Purchases of Property and Equipment
    (126,835 )     (184,000 )
Purchases of Intangible Assets
    (2,119 )     631  
                 
Net Cash (Used) Provided in Investing Activities
    (128,954 )     (183,369 )

“Continued on next page”
 
“The accompanying notes are an integral part of these financial statements”
 
 
7

 
 
CHINA LITHIUM TECHNOLOGIES, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
   
Six Months Ended
December 31
 
Cash Flows From Financing Activities:
 
2010
   
2009
 
   
(Restated)
       
Loan from and (Repayment) to Shareholder
    49,915       (381,334 )
Capital Contribution
    -       114,486  
                 
Net Cash (Used) Provided by Financing Activities
    49,915       (266,848 )
                 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    192,499       47,798  
                 
Increase in Cash and Cash Equivalents
    183,342       488,679  
                 
Cash and Cash Equivalents -Beginning Balance
    2,761,427       407,333  
                 
Cash and Cash Equivalents - Ending Balance
  $ 2,944,769     $ 896,012  
                 
Supplemental Disclosures of Cash Flow Information:
               
                 
Cash Paid During the Periods for:
               
Interest Paid
    -     $ 32,776  
Income Taxes
  $ 462,618     $ 423,628  
                 
Non-Cash Investing and Financing Activities:
               
                 
Common Stock Transferred for Stock-based Compensation
  $ 717,000     $ -  
Issued 1,500,000 Restricted Common Stock to Employees
  $ 1,650,000     $    
 
“The accompanying notes are an integral part of these financial statements”
 
 
8

 
 
1. ORGANIZATION AND BASIS OF PRESENTATION

The Company was incorporated as Sweet Little Deal, Inc. in 1986 under the laws of the State of Minnesota. On October 10, 1991, the Company changed its name to Physicians Insurance Services, Ltd. On July 23, 2008, the Company held a shareholder meeting approving a migratory merger to Nevada and changed its name to PI Services, Inc., which became effective January 12, 2009. On May 6, 2010, PI Services, Inc. changed its name to China Lithium Technologies, Inc. (the “Company”) to reflect the reverse merger of Sky Achieve Holdings, Inc. (“Sky Achieve”) into the Company, which became effective on June 2, 2010.
 
On March 19, 2010 the Company acquired all of the outstanding capital stock of Sky Achieve, a British Virgin Islands limited liability corporation registered in November, 2009 (the “Share Exchange”). Pursuant to ASC 805-10-55-12 et seq., Sky Achieve is deemed to be the acquirer in the Share Exchange, as the prior owner of Sky Achieve obtained the largest portion of the voting rights in the combined entity, and the assets and earnings of Sky Achieve substantially exceeded those of PI Services. The effect of the Share Exchange is such that a reorganization of the entities has occurred for accounting purposes and is deemed to be a reverse merge recapitalization of Sky Achieve. The financial statements presented in this report are those of Sky Achieve and its subsidiaries, including their VIEs, as if the Share Exchange had been in effect retroactively for all periods presented.

Sky Achieve was organized on November 5, 2009 under the laws of British Virgin Islands. It had no business activity from its inception until January 5, 2010. On January 5, 2010, Sky Achieve obtained control over the business of Beijing Guoqiang Science and Technology Development Co., Ltd (“Beijing Guoqiang”) by entering into five agreements with and the equity owners of Beijing Guoqiang. The agreements are designed to transfer to Sky Achieve all of the responsibilities for management of the operations of Beijing Guoqiang, as well as all of the benefits and all of the risks that arise from the operations of Beijing Guoqiang. The relationship is purely contractual, however, so the rights and responsibilities of Sky Achieve with respect to Beijing Guoqiang are ultimately dependent on the willingness of the courts of the PRC to enforce the agreements. For accounting purposes, Beijing Guoqiang is deemed to be a variable interest entity with respect to Sky Achieve, and its balance sheet accounts and financial results are consolidated with the accounts and results of Sky Achieve for financial reporting purposes.

The Company issued 19,151,875 shares of its common stock to the shareholders of Sky Achieve. Those shares represented 95 % of the outstanding shares of the Company. Mr. Kun Liu, the Chairman of Beijing Guoqiang purchased additional 1% of the outstanding shares of the Company simultaneously with the share exchange. As a result of these transactions, persons associated with Beijing Guoqiang owned securities that represented 96% of the equity in the Company as of the completion of the Share Exchange.

Beijing Guoqiang designs, manufacturers and markets Polymer Lithium-ion Battery Modules, Lithium-ion Battery Chargers, Lithium-ion Battery Management Systems as well as other Lithium-ion Battery Management Devices essential to proper power utilization ("PLI Battery Products"). During December of 2009, the Company set up two manufacturing facilities in Hangzhou and Guangzhou to produce power and battery charger.

Reverse stock split
 
On June 2, 2010, the Company implemented a 1-for 2.2 reverse split of its common stock. All enumerations herein of numbers of common shares or per share amounts have been adjusted as needed to give retroactive effect to the reverse stock split.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation
 
The accompanying financial statements include China Lithium Technologies, Inc. and its wholly owned subsidiary, Sky Achieve Holdings, Inc., as well as its variable interest entity, Beijing Guoqiang Global Science and Technology Development Co, Ltd. All significant inter-company transactions and balances have been eliminated in the consolidation.
 
 
9

 
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Variable interest entity
 
The accounts of Beijing Guoqiang have been consolidated with the accounts of the Company because Beijing Guoqiang is a variable interest entity with respect to Sky Achieve, which is a wholly-owned subsidiary of the Company. Sky Achieve is party to five agreements dated January 5, 2010 with the owners of the registered equity of Beijing Guoqiang and with Beijing Guoqiang. The agreements transfer to Sky Achieve all of the benefits and all of the risk arising from the operations of Beijing Guoqiang, as well as complete managerial authority over the operations of Beijing Guoqiang. Sky Achieve is the guarantor of all of the obligations of Beijing Guoqiang. By reason of the relationship describe in these agreements, Beijing Guoqiang is a variable interest entity with respect to Sky Achieve because the following characteristics in ASC 810-10-15-14 are present:

 
The holders of the equity investment in Beijing Guoqiang lack the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of Beijing Guoqiang, having assigned their voting rights and all managerial authority to Sky Achieve. (ASC 810-10-15-14(b)(1)).

 
The holders of the equity investment in Beijing Guoqiang lack the obligation to absorb the expected losses of Beijing Guoqiang, having assigned to Sky Achieve all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2)).

 
The holders of the equity investment in Beijing Guoqiang lack the right to receive the expected residual returns of Beijing Guoqiang, having granted to Sky Achieve all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)).

Because the relationship between Beijing Guoqiang and Sky Achieve is entirely contractual, the Company’s interest in Beijing Guoqiang depends on the enforceability of those agreements under the laws of the PRC. We are not aware of any judicial decision as to the enforceability of similar agreements under PRC law.

Reclassification
 
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported total assets, liabilities, stockholders’ equity or net income.
 
Cash and cash equivalent
 
For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Trade accounts receivable
 
Trade accounts receivable are stated at net realizable value, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables.

The Company determines the allowance based on historical write-off experience, customer specific facts and current crisis on economic conditions. Bad debt expense is included in the general and administrative expenses.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventories
 
Inventories are initially stated at the level of the original cost. The cost of inventories is determined using first-in first-out cost method, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In case of finished goods and work in progress, cost includes an appropriate share of production overhead based on normal operating capacity.
 
The Company regularly reviews the cost of inventories against their estimated fair market value and records a lower of cost or market write-down for inventories that have cost in excess of estimated market value.

 
10

 
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Advances to suppliers
 
The Company makes advances to certain vendors for inventory purchases. The advances to suppliers were $22,449 and $12,297 as of December 31, 2010 and June 30, 2010 respectively.

Property and equipment
 
Property and equipment are stated at cost, net of accumulated depreciation. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.

Plant and equipments are depreciated using the straight-line method over 3-5 years estimated useful lives.
 
Leasehold improvements are amortized using the straight-line method over the term of the leases or the estimated useful lives, whichever is shorter.
 
Construction in progress
 
Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for intended use. The values of construction in progress were $0 and $0 as of December 31, 2010 and June 30, 2010 respectively.

Impairment of long-lived assets
 
The Company accounts for long-lived assets in accordance with ASC 360 “Accounting for the Impairment of Disposal of Long-Lived Assets”, which became effective January 1, 2002. Under ASC 360, the Company reviews long-term assets for impairment whenever events or circumstances indicate that the carrying amount of those assets may not be recoverable. The Company has not incurred any losses in connection with the adoption of this statement.

Revenue recognition
 
The Company recognizes revenue on product sales when each of the following conditions has been satisfied:

 
Persuasive evidence of a sales arrangement exists in the form of a written contract or an order and acknowledge.

 
● 
The sales price has been fixed and made determinable by sales contract and/or invoice.

 
The product has been delivered to the customer’s warehouse – unless other terms for delivery have been specified in the contract – at which time the customer takes ownership and the risk of loss passes to the customers.

 
● 
Payment has been received or the Company determines that collection of the related receivable is probable. Probability of collection is determined based on recurrent visits by the Company’s sales staff and accounting staff to the customer’s premises to assess the health of the customer’s business.

 
● 
The 15 day right of return that we afford to customers has expired.

Net sales of products represent the invoiced value of goods, net of Value Added Taxes (“VAT”), sales returns, trade discounts and allowances. The Company is subject to VAT which is levied on the majority of the products of the Company at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. Our standard contract allows customers, within 15 days after delivery, to return for cash or exchange products with which they are not satisfied. Shipping charges on the return are allocated between the customer and the Company based on relative fault. We do not recognize revenue until the 15 day right of return has expired. After the 15 days has expired, the Company provides customers with no additional post-delivery rights, except as set forth in its product warrant. We record a provision for warranty claims, which is based on historical warranty claims data and represents the Company’s best estimate of warranty claims it will experience.
 
 
11

 
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Cost of goods sold
 
Cost of goods sold consists primarily of material, and related expenses, which are directly attributable to the production of products. The Company presents cost of goods sold and manufacturing expenses separately in the income statement.
 
Use of estimates
 
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and valuation allowances for receivables.  Actual results could differ from those estimates.
 
Concentration of credit risk
 
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents and accounts and other receivables. As of December 31, 2010 and June 30, 2010, substantially all of the Company’s cash and cash equivalents were held by major banks located in the PRC of which the Company’s management believes high credit quality banks. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition and customer payment practices to minimize collection risk on account receivable.
 
Foreign currency translation
 
The functional currency of Beijing Guoqiang is Chinese Renminbi (“RMB”). For financial reporting purposes, RMB has been translated into United States Dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates, and income and expenses items are translated using the average rate for the period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income." Gains and losses resulting from foreign currency translation are included in accumulated other comprehensive income.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC. Translation of amounts from RMB into US dollar has been made at the following exchange rates for the respective years:
 
December 31, 2010
   
Balance sheet
 
RMB 6.5920 to US $1.00
Statement of income and other comprehensive income
 
RMB 6.6489 to US $1.00
     
June 30, 2010
   
Balance sheet
 
RMB 6.7889 to US $1.00
Statement of income and other comprehensive income
 
RMB 6.8180 to US $1.00
 
Income taxes
 
The Company accounts for income tax under the provisions of FASB ASC 740 "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been 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, whenever necessary, against net deferred tax assets when it is more likely than not that some portion or the entire deferred tax asset will not be realized. There are no deferred tax amounts as of December 31, 2010 and June 30, 2010.
 
 
12

 
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Fair value of financial instruments
 
The Company’s financial instruments include cash and cash equivalents, accounts receivable, advances to suppliers, other receivables, accounts payable, accrued expenses, taxes payable, payroll and other loans payable. Management has estimated that the carrying amounts approximate their fair value due to the short-term nature.

Commitments and contingencies
 
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Intangible assets
 
Intangible assets mainly consist of patents. Patents have being amortized using the straight-line method over the 10 years. Other intangible assets have being amortized using the straight-line method over the 5 years.  The Company also evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.

Comprehensive income
 
Comprehensive income is defined to include changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.
 
Statement of cash flows
 
In accordance with Accounting Standards Codification, ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the 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.

Reserved funds
 
Until June 20, 2006, entities organized in the PRC were required to transfer 15% of their profit after taxation, as determined in accordance with Chinese accounting standards and regulations, to the surplus reserve fund. Subject to certain restrictions set out in the Chinese Companies Law, the surplus reserve fund may be distributed to stockholders in the form of share bonus issues and/or cash dividends. After June 30, 2006, such reserve is no longer mandatory under the Chinese Law. However the Company from time to time allocates funds to its reserve fund for its future development.

Stock-based compensation
 
The Company adopted the provisions of ASC 718, “stock compensation,” which establishes the accounting for employee stock-based awards. Under the ASC 718, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (i.e. the vesting period of the grant).  The fair value of shares granted is deemed to be the closing traded price of our common stock on the date of grant. 

Generally shares issued to employees will be vested over a requisite service period. These shares will be amortized over the vesting period in accordance with ASC 718. The average vesting period for the shares issued to date has been 4.54 years, based on the terms of the employment agreements under which the stock was awarded. The stock-based compensation was $907,385 and $0 for the six months ended December 31, 2010 and 2009, respectively.

Recently issued accounting standards
 
In April 2010, FASB issued an amendment to Stock Compensation. The amendment clarifies that an employee stock-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Our adoption of this guidance does not have impact on the consolidated financial statements since our stock-based payment awards have an exercise price denominated in the same currency of the market in which our Company shares are traded.
 
 
13

 
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
In January 2010, FASB issued ASU No. 2010-06 - Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of its ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In January 2010, FASB issued ASU No. 2010-02 - Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51." If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its financial statements.
 
 
14

 
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
In December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1)
the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets.

In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140.The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

3. INVENTORIES

The components of inventories at December 31, 2010 and June 30, 2010 are as follows:

   
December 31,
2010
   
June 30,
2010
 
Raw Materials
  $ 461,742     $ 440,027  
Work in Process
    358,995       90,428  
Finished Goods
    399,683       253,827  
Low Value Items
    1,783       1,731  
Total
  $ 1,222,202     $ 786,013  

As of December 31, 2010 and June 30, 2010, the Company has not recorded any reserve for inventory obsolescence.
 
 
15

 
 
4. PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31, 2010 and June 30, 2010 are as follows:

   
December 31,
2010
   
June 30,
2010
 
Building and Improvement
  $ 134,129     $ 41,859  
Machinery and Equipment
    352,138       307,249  
Motor Vehicle
    30,443       29,460  
Less: Accumulated Depreciation
    (157,799 )     (116,757 )
Total Property and Equipment, net
  $ 358,912     $ 261,811  

Depreciation expenses for two quarters ended December 31, 2010 and year ended June 30, 2010 were $37,113 and $69,021 respectively.

5. PATENT AND OTHER INTANGIBLES

The net book value of intangible assets as of December 31, 2010 and June 30, 2010 was comprised of the following:

   
December 31,
2010
   
June 30,
2010
 
Intangible Assets
  $ 112,026     $ 106,719  
Less: Accumulated Amortization
    (40,060 )     (33,811 )
Total Intangible Assets, net
  $ 71,966     $ 72,907  

Amortization expenses for the two quarters ended December 31, 2010 and year ended June 30, 2010 were $5,151 and $10,561 respectively.

Based upon current assumptions, the Company expects that, during the next five years, its intangible assets will be amortized according to the following schedule:

Balance at June 30,
 
Amount
 
2011
  $ 10,733  
2012
    10,733  
2013
    10,733  
2014
    10,733  
2015
    10,733  
Total 5 years
  $ 53,665  

6.  ACCOUNTS RECEIVABLE

Accounts receivable are uncollateralized, non-interest bearing customer obligations typically due under terms requiring payment from the invoice date. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the oldest unpaid invoices. As of December 31, 2010 and June 30, 2010, accounts receivable and allowance for doubtful account as follow:

   
December 31,
2010
   
June 30,
2010
 
Accounts Receivable
  $ 4,924,419     $ 4,201,211  
Less: Allowance for Doubtful Accounts
    -       (147,022 )
Total Accounts Receivable, net
  $ 4,924,419     $ 4,054,189  

 
16

 

7.  ACCOUNTS PAYABLE

The Company has accounts payable related to the purchase of inventory. The amount of $1,437,184 and $1,832,512 as of December 31, 2010 and June 30, 2010 respectively, represent the accounts payable by the Company to the suppliers.

8.  ACCRUED EXPENSES AND OTHER PAYABLE

Accrued expenses consist of audit fee and the payroll taxes for the current year. As of December 31, 2010 and June 30, 2010, the balances were $46,420 and $45,074, respectively.

Other accounts payable consists of miscellaneous items. As of December 31, 2010 and June 30, 2010, the balances were $4,912 and $4,495, respectively.

9. WARRANTY ACCRUAL

The Company provides its customers a 2 years warranty on all products sold. In anticipation of warranty repairs, the Company accrues 1% of the sales amount as a “Warranty Accrual.” The Company believes that the accrual is adequate based on its historical warranty experience. If the goods sold have no quality problems within 2 years, the Company reverses the warranty accrual. As of December 31, 2010 and June 30, 2010, the warranty accrual was $290,603 and $237,374 respectively.

For the six months ended December 31, 2010, the company paid $6,201 directly for warranty claims. Also, the company accrued $51,879 as the warranty accrual with respect to sales during the period.

10. STOCKHOLDERS’ EQUITY

As of December 31, 2010, 783,000,000 shares have been authorized and 21,659,811 shares are outstanding. The Company implemented a 1-for-2.2 reverse split on June 2, 2010. Retroactive effect is being given to the reverse split in these financial statements.  Income statements have retroactively used the new outstanding shares to calculate the EPS. Stated capital in the stockholders’ equity section has been reduced accordingly.

11. STOCK-BASED COMPENSATION
 
On September 2, 2010, a principal shareholder of the Company transferred 358,500 shares of common stock to the Company’s employees in recognition of prior services. The Company has recorded the transfer as a contribution to the Company’s capital and a stock-based compensation expense, which was valued by the closing stock price of $2.00 at the date of transfer, since these shares were fully-vested and non-forfeitable. The contribution to capital and compensation cost recorded to in relation to this transfer during the period ended December 31, 2010 was $717,000.

On October 6, 2010, the Company adopted the 2010 Stock Award Plan (the “2010 Plan”). The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of the participants of the Plan (the "Participants") to those of the Company's stockholders, and by providing the Participants with an incentive for outstanding performance. The Company has reserved 3,000,000 shares of common share for the options and awards under the 2010 Plan. 

Subject to the terms and provisions of the 2010 Plan, the Board of Directors, at any time and from time to time, may grant shares of stock to eligible persons in such amounts and upon such terms and conditions as the Board of Directors shall determine. 

The Board of Directors shall have the authority to determine all matters relating to the stock to be granted under the 2010 Plan, including selection of the individuals to be granted awards, the number of share, the date of termination of the stock awards, vesting schedules and all other terms and conditions thereof. 
 
 
17

 
 
11. STOCK-BASED COMPENSATION (continued)
 
The Company issued 1,500,000 shares provided in the 2010 Plan in the form of grants of restricted common stock on October 18, 2010, valued by using the closing stock price of $1.10 on that date.  As of December 31, 2010, none of those shares had vested and no share had been cancelled.  A summary of the status of the Company’s unearned stock compensation under the 2010 Plan as of December 31, 2010, and changes for the period ended December 31, 2010, is presented below:

Unearned Stock Compensation as of October 18, 2010
  $ 1,650,000  
Unearned Stock Compensation Granted
    -  
Amortization of Unearned Stock Compensation
    (190,385 )
Unearned Stock Compensation as of December 31, 2010
  $ 1,459,615  

12. INCOME TAXES

In accordance with the relevant tax laws and regulations of PRC, Beijing Guoqiang is subject to income tax at an effective rate of 25% from January 1, 2008 on income reported in the statutory financial statements after appropriated tax adjustments. Because there is no income tax in the British Virgin Islands, Sky Achieve is not subject to taxation in its domicile.

The Company had no uncertain tax positions as of December 31, 2010 and June 30, 2010. The following table sets forth the components of the Company’s income before income tax expense and the components of income tax expense for the six months ended December 31, 2010 and June 30, 2010:

   
December 31,
2010
   
June 30,
2010
 
China Pre-tax Income
  $ 1,227,639     $ 3,266,452  
Domestic Pre-tax Income
    -       -  
Total Pre-tax Income
  $ 1,227,639     $ 3,266,452  
 
   
December 31,
2010
   
June 30,
2010
 
   
(Restated)
       
China Income Tax Expense
  $ 549,076     $ 837,486  
Domestic Income Tax Expense
    -       -  
Total Current Income Tax Expense
  $ 549,076     $ 837,486  

A reconciliation of tax at United States federal statutory rate to provision for income tax recorded in the financial statements is as follows:

   
December 31,
2010
   
June 30,
2010
 
   
(Restated)
       
U.S. Statutory Income Tax Rate
    34.0 %     34.0 %
Foreign Income not Recognized in the U.S.
    (34.0 %)     (34.0 %)
China Statutory Income Tax Rate
    25.0 %     25.0 %
Other Items (a)
    19.73 %     0.64 %
Effective Consolidated Current Income Tax Rate
    44.73 %     25.64 %
 

(a)
The 19.73% and 0.64% represent $966,144 (including $907,385 stock-based compensation expense) and $83,492 of corporate expenses incurred by the Company’s US office that are not subject to PRC income tax for the six months ended December 31, 2010 and year ended June 30, 2010.
 
 
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13. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.

The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The future profitability of the Company is dependent upon the Company's abilities to secure service contracts and maintain the operating expense at a competitive level.

Concentration of credit risk
 
Financial instruments that potentially subject to significant concentrations of credit risk consist of cash and cash equivalents. As of December 31, 2010 and June 30, 2010, substantially all of the Company’s cash and cash equivalents were held by major banks which located in the PRC. The Company’s management believes that there are remote chances the Company will loss money on those banks. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition and customer payment practices to minimize collection risk on account receivables.

The major customers which represented more than 5% of total Accounts Receivable as follows:

   
December 31, 2010
   
June 30, 2010
 
Customer Name
 
Amount
   
%
   
Amount
   
%
 
Beijing Anhualianhe Co., Ltd
    217,007       4.41 %     275,539       6.56 %
Beijing Renxinyu Trading Co., Ltd
    308,285       6.26 %     474,070       11.28 %
Yangguangsanwei Electronic Appliance Co., Ltd
    167,386       3.40 %     258,880       6.16 %
Beijing Ziqiangfa Technology Co., Ltd
    75,213       1.53 %     256,231       6.10 %
Beijing Jiruiyueda Electronic Facility Co., Ltd
    -       0.00 %     349,617       8.32 %
Guangzhou Chuangxin Power Technology Co., Ltd
    132,173       2.68 %     413,795       9.85 %
Saiensi Resource Co., Ltd
    324,911       6.60 %     149,554       3.56 %
Shandong Motor Way Fujian Branch
    665,220       13.51 %     -       0.00 %
 
The major vendors which represented more than 5% of total Accounts Payable as follows:

   
December 31, 2010
   
June 30, 2010
 
Vendor Name
 
Amount
   
%
   
Amount
   
%
 
Heilongjiang Zhongqiang Power Tech Ltd
    885,176       61.59 %     1,593,055       86.93 %
Guangzhou Fanyubaiyun Electronic Co., Ltd
    101,519       7.06 %     98,574       5.38 %

The major customers which represented more than 5% of the total sales for the six months ended December 31, 2010:

   
Six months ended
December 31, 2010
 
Customer Name
 
Amount
   
%
 
Beijing Renyuxin Trading Co., Ltd
    409,403       5.15 %
Shandong Motor Way Fujian Branch
    714,812       8.99 %

 
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13. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS (continued)

The major vendors which represented more than 5% of the total purchases for the six months ended December 31, 2010:

   
Six months ended
December 31, 2010
 
Vendor Name
 
Amount
   
%
 
Heilongjiang Zhongqiang Power Tech Co., Ltd
    2,764,246       51.37 %
Beijing Anhualianhe Power Tech Co., Ltd
    1,627,262       30.24 %
Guangzhou Fanyubaiyun Electronic Co., Ltd
    312,088       5.80 %
 
14. RELATED PARTY TRANSACTIONS

A significant portion of the Company’s raw materials were purchased from Heilongjiang Zhongqiang Power Tech Co., Ltd (Heilongjiang ZQPT), which is a subsidiary of Advanced Battery Technologies, Inc (ABAT). One of our Company’s directors, Mr. Qiang Fu, is an immediate family member of the CEO of ABAT, which has exclusive control over the business of Heilongjiang ZQPT. In the six-month period ended December 31, 2010, purchases from Heilongjiang ZQPT totaled $2,764,246, or 51.37% of the total purchases for the six-month period. As of December 31, 2010, the total amount due to Heilongjiang ZQPT was $885,176, or 61.59% of the total accounts payable. As of June 30, 2010, the total amount due to Heilongjiang ZQPT was $1,593,055, or 86.93% of the total accounts payable.

As of June 30, 2010, there are two supply contacts outstanding between the Company and Heilongjiang ZQPT, one dated February 24, 2010 and the other dated March 22, 2010. The February 24 contact contains the parties’ agreement to purchase and sell 3000 units of a specified 72 volt battery for 27,000 RMB per unit. Delivery will be scheduled by Beijing Guoqiang by notice not less than 25 days before delivery. Heilongjiang ZQPT shall pay transportation costs. Title transfers ex factory, and national testing standards will apply. The March 22 contract has identical terms, but contemplates the purchase and sale of 60,000 units of a 3.2 volt battery at 105 RMB per unit.

15.   RESTATEMENT

We have restated the Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 30, 2009 and June 30, 2010. The reason for the restatement is that the Consolidated Statements of Changes in Stockholders’ Equity as originally issued failed to properly account for the reverse merger of Sky Achieve Holdings into the Company in March 2010. Pursuant to ASC 805-40-45-1, the Consolidated Statements of Changes in Stockholders’ Equity of the Company after the reverse merger should reflect the historic capital structure of Sky Achieve Holdings (the accounting acquirer) adjusted to reflect the legal capital of the Company prior to the reverse merger. As a result of the restatement, the capital associated with the shares issued in the reverse merger is shown as outstanding in the balance at June 30, 2008 and thereafter, and the effect of the reverse merger is a reclassification of $19,151 from additional paid-in capital to stated capital. The restatement did not have a material effect on the total stockholders’ equity at any period.

We have restated the financial statements and accompanying notes for the quarter ended September 30, 2010. The reason for the restatement is: 
 
The Company failed to recognize 358,500 shares transferred from Mr. Kun Liu on September 2, 2010 in the financial statements for the quarter ended September 30, 2010.  The shares were transferred in recognition of prior services, and were fully-vested and nonforfeitable.  Pursuant to SAB Topic 5-T, these shares should be measured at the fair value of the Company’s stock on September 2, 2010 and recorded as compensation expenses during the quarter ended September 30, 2010.

Included among the shares were 25,000 transferred to professionals in recognitionof services to the Company.  The shares were fully-vested and nonforfeitable.  Pursuant to ASC 505-50-25-7 the shares issued to the professionals were recognized as an immediate expense in the restated financial statements.
 
 
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15.   RESTATEMENT (continued)
 
The restatement had the following effects on the Company’s financial statements as of September 30, 2010 and for the quarter then ended:

   
As Reported
   
As Restated
 
Additional Paid-in Capital
  $ 252,771     $ 969,771  
Retained Earnings
    5,282,530       4,565,530  
                 
General and Admininistrative Expense
    128,380       845,380  
Income from Operations
    842,985       125,985  
Net Income
    630,260       (86,740 )
EPS- Basic and Diluted
  $ 0.003     $ (0.01 )
 
We have restated the Consolidated Balance Sheets as of December 31, 2010, Consolidated Statements of Operations and Comprehensive Income for the three and six months ended December 31, 2010 and accompanying notes. The reason for the restatement of Consolidated Balance Sheets is that the inclusion of “deferred stock-based compensation expense” as a separated component of stockholders’ equity was not appropriate. In the restatement, we eliminated this line item and included the charge as an offset to additional paid-in capital. The reason for the restatement of Consolidated Statements of Operations and Comprehensive Income is that we failed to exclude the unvested shares when calculating the weighted average shares and the accumulated tax effect for our US office when calculating tax expenses. In the restatement, we excluded the unvested shares from the calculation of weighted average shares. The restatement had the following effects on the Company’s financial statements as of December 31, 2010 and for the quarters then ended:

   
As Reported
   
As Restated
 
Additional Paid-in Capital as of December 31, 2010
  $ 2,618,271     $ 1,158,656  
Retained Earning as of December 31, 2010
    5,557,681       5,330,835  
                 
Provision for Income Taxes – Three Months Ended December 31, 2010
    285,431       333,028  
Provision for Income Taxes – Six Months Ended December 31, 2010
    322,230       549,076  
Net Income – Three Months Ended December 31, 2010
    812,900       765,304  
Net Income – Six Months Ended December 31, 2010
    905,410       678,563  
Diluted Weighted Average Common Shares – Three Months Ended December 31, 2010
    21,359,811       20,159,811  
Diluted Weighted Average Common Shares – Six Months Ended December 31, 2010
    20,759,811       20,159,811  
Diluted EPS – Six Months Ended December 31, 2010
  $ 0.04     $ 0.08  
 
 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis should be read in conjunction with the company's Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-Q as well as the company's other SEC filings, including our annual report on Form 10-K for the year ended June 30, 2010.

Forward Looking Statements
 
The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. We disclaim any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements. The information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 .

OVERVIEW

We are a holding company incorporated in the State of Nevada. Our wholly-owned subsidiary is the beneficiary of an entity in China that designs, manufactures and markets polymer lithium-ion battery safety systems, modules of batteries, lithium-ion battery chargers and power supplies, as well as other lithium-ion battery management devices essential to proper power utilization ("PLI Battery Products").

 Acquisition of Achieve

On March 19, 2010, the Company acquired all of the outstanding capital stock of Sky Achieve, a company organized under the laws of British Virgin Islands on November 5, 2009. Sky Achieve had no business activity from its inception until January 5, 2010. On January 5, 2010, Sky Achieve obtained control over the business of Beijing GuoQiang Global Science & Technology Development Co., Ltd, a PRC limited liability company ("Beijing Guoqiang"). Pursuant to the Variable Interest Agreements ("VIE Agreements") with Beijing Guoqiang and its shareholder, each of which has a term of ten years, Sky Achieve provides consulting and management services to Beijing Guoqiang, has exclusive control over Beijing GuoQiang's daily operations and financial affairs, appoints its senior executives, and approves all matters requiring shareholder approval. As a result of these contractual arrangements, the Company is the beneficiary of all of the assets and is responsible for all of the liabilities of Beijing Guoqiang. Accordingly, we have consolidated Beijing Guoqiang's financial results, assets and liabilities in our financial statements since the execution of the VIE Agreements.

 
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Change of Name and Reverse Split

Effective on June 2, 2010, we changed our name to China Lithium Technologies, Inc. and effectuated a reverse split of our common stock in the ratio of 1:2.2 (the "Reverse Split").

RESULTS OF OPERATIONS

Our revenue during the three months ended December 31, 2010 was $4,268,090, an increase of $762,617 or 22% from the revenue we reported for the three months ended December 31, 2009. Revenue during the six months ended December 31, 2010 was $7,972,767, an increase of 7% from the six months ended December 31, 2009 The increase in our revenue during the three and six months was primarily due to our success in attracting new customers. During the six months ended December 31, 2010, $725,090 in revenue arose from sales to customers who had made no prior purchases. In addition, sales growth resulted from our success in refocusing our marketing on higher margin products, specifically replacing sales of low margin battery packs with sales of higher margin power supplies and battery chargers along with increased sales of our battery modules. This reorientation of our sales is evident in the following breakdown of per-product line revenues:

   
3 months
 ended
 Dec 31, 2010
   
3 months
 ended
 Dec 31, 2009
   
Change
   
Percentage
 
Battery Safety System
    2,166,819       2,287,373       (120,554 )     -5.27 %
Battery Module
    937,549       274,638       662,911       241.38 %
Battery Pack
    40,106       293,341       (253,235 )     -86.33 %
Electric Vehicle Battery
    570,229       267,379       302,850       113.27 %
Power
    461,377       373,446       87,931       23.55 %
Chargers
    92,021       9,297       82,724       889.84 %
Total Revenue
    4,268,090       3,505,473       762,617       21.76 %
 
   
6 months
 ended
 Dec 31, 2010
   
6 months
 ended
 Dec 31, 2009
   
Change
   
Percentage
 
Battery Safety System
    4,283,592       4,596,704       (313,112 )     -6.81 %
Battery Module
    1,781,760       376,225       1,405,534       373.59 %
Battery Pack
    104,845       1,297,454       (1,192,609 )     -91.92 %
Electric Vehicle Battery
    837,992       789,297       48,695       6.17 %
Power
    787,559       359,880       427,679       118.84 %
Chargers
    177,019       8,959       168,060       1875.89 %
Total Revenue
    7,972,767       7,428,519       544,248       7.33 %

 
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There was no significant change in the efficiency of our manufacturing operations from the second quarter of fiscal year 2010 to the second quarter of fiscal year 2011. Our gross margin in each period was approximately 35%. Accordingly, our gross profit increased in proportion to the increase in our revenue from period to period. The comparison of six month periods showed an improvement, however, as we achieved a 35% gross margin in the six months ended December 31, 2010 and only a 30% gross margin in the six months ended December 31, 2009. The improvement was primarily attributable to the fact that in the later part of fiscal year 2010 we reoriented our sales effort to reduce the sales of battery packs, which had a margin of 10%, and increase the sales of power supplies (49% profit margin) and battery chargers (25% profit margin).

Our operating expenses increased significantly in both the three and six month periods ended December 31, 2010. During the three months ended December 31, 2010, the primary increase was in sales expenses, which increased by 96% ($66,039). Sales expenses also increased in the six months ended December 31, 2010, growing 186% ($250,193) over sales expenses in the six months ended December 31, 2009. The primary reason for these sharp increases has been our efforts to upgrade our selling effort. At the end of the June 2010 fiscal year, we signed a contract, to commence in July 2010, with a sales training company. The trainers are implementing a fully program of sales training for our marketing staff. As a result, we paid $39,000 for sales training in the three months ended December 31, 2010 and $89,000 for sales training in the six months ended December 31, 2010.

General and administrative expenses also increased sharply in both periods, showing a 35% ($52,339) increase in the three months ended December 31, 2010 and a 274% ($768,201) increase in the three months ended December 31, 2010. The cause of the increases was stock compensation given to our employees to incentivize them. On September 2, 2010, our Chairman, Kun Liu, transferred 313,500 of his shares to our employees. He also transferred 25,000 shares to another member of our board of directors, and 20,000 shares to our U.S. securities attorneys. Because these transfers were made for the benefit of the Company, we account for them as if the Company had issued the shares. Accordingly, we recorded a compensation expense of $ 717,000 , the market value of the shares, in the first quarter of fiscal 2011.

We also issued 1,500,000 shares to six of our most important employees in October 2010. The shares vest over a five year period, and we will recognize the expense related to the shares over that period. During the quarter ended December 31, 2010 we expensed $190,385 as a result of the October grant; at the end of the quarter there remains $1,459,615 in value that will be expensed over the remaining vesting terms.

 
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As a result of the increase in our operating expenses during the recent periods, the 22% increase in our revenue from the second quarter of fiscal 2010 to the second quarter of fiscal 2011 yielded only a 20% increase in net income: from $677,599 in the three months ended December 31, 2009 to $812,900 in the three months ended December 31, 2010, and our net income fell by 28% from the first half of fiscal 2010 to the first half of fiscal 2011. Since the decline was attributable to the $717,000 stock-based compensation expense in the first quarter, an event that we do not plan to replicate, we expect that in the future our net income will grow as our revenues grow.

The functional currency of our subsidiaries and affiliate operating in the PRC is the RMB. The financial statements of our subsidiaries and affiliate are translated into U.S. dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange (for the year) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $103,284 and $201,969 during the three and six months ended December 31, 2010, as compared to $139 and $35,562 during the three and six months ended December 31, 2009. This non-cash gain increased our reported comprehensive income.

LIQUIDITY AND CAPITAL RESOURCES

During the first six months of fiscal 2011, our working capital increased by $1,918,604 to $7,074,868 at December 31, 2010. The increase was approximately equal to our net income for the six month period plus the $717,000 stock-based compensation expense that we incurred. The two components of working capital that made the largest increases were:

 
Accounts receivable, which increased by $870,290. The increase was primarily attributable to the 22% increase in our second quarter sales volume. In addition, we re-evaluated our accounts receivable at December 31, 2010 and determined that the $147,022 allowance for doubtful accounts that we recorded at June 30, 2010 could be reversed, as we had no accounts that were older than 90 days at December 31, 2010 and all accounts appeared likely to be paid on time. It should be noted that the program we had initiated in fiscal 2010 of allowing new customers extended payment terms has resulted in no accounts that are older than would be allowable under our customary payment terms.
            
 
Inventory, which increased by $436,189. The increase reflects our higher level of operations, as $414,370 of the increase consisted of work in progress and finished goods. Our raw material inventory did not rise significantly, reflecting the effect of the ABC inventory management system that we implemented earlier in the year. Under that system, we classify the components used for our products by availability and price sensitivity. We maintain low or no inventories of commonly available components and purchased them as needed. On the other hand, we purchased components with long delivery cycles when prices appeared low, and kept them in stock to assure availability. The initial result of this program was a significant reduction in our raw materials inventory. We expect our raw materials inventory will maintain at its current level in the near future, while our work in progress and finished goods inventory will grow in proportion to our sales growth.
 
 
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Despite net income of $905,410 for the six months ended December 31, 2010 (which was reduced by a non-cash stock-based compensation expense of $717,000), our operations provided us only $69,882 in cash. The primary reasons for the discrepancy were the increases in accounts receivable and inventory discussed above. In addition, we used $513,125 in cash to reduce our accounts and taxes payable. In other words, this low cash yield from operations was a result of management allocation of resources, and is not indicative of the liquidity of our operations. During the year ended June 30, 2010, our operations provided us $2,728,015 in cash, including $891,097 in the first half of that year. We expect that for the forseeable future, our operations will provide us significant cash yield.

Our working capital is nearly double our annual operating expenses, and our operations are cash-positive. With these resources, we expect that we will be able to fund the implementation of our business plan for the forseeable future.

FOREIGN EXCHANGE EXPOSURE

Our sales are denominated in RMB and US dollars whilesour purchases and operating expenses are mostly denominated in RMB. As such, we may be exposed to any significant transactional foreign exchange exposure for our operations. However, to the extent that we may enter into transactions in currencies other than RMB in future, particularly as we penetrate into overseas markets, our financial results may be subject to fluctuations between those foreign currencies and RMB.

On July 21, 2005, the RMB was unpegged against the US dollars and pegged against a basket of currencies on a "managed-float currency regime". As at December 31, 2010, the exchange rate was approximately US$1.00 to RMB6.5920 for the balance sheet, and US$1.00 to RMB6.6489 for the statement of income and other comprehensive income, respectively. There is no assurance that the PRC's foreign exchange policy will not be further altered. In the event that the PRC's policy is altered, significant fluctuations in the exchange rates of RMB against US dollars may arise. As a result, we will be subject to significant foreign exchange exposure. In the event that we incur foreign exchange losses, our financial performance will be adversely affected.

We do not have a formal hedging policy with respect to our foreign exchange exposure as our foreign exchange gains/ losses for the periods under review have been relatively insignificant. We will continue to monitor our foreign exchange exposure in the future and will consider hedging any material foreign exchange exposure should the need arise. Should we enter into any hedging transaction in the future, such transaction shall be subject to review by our board of directors. In addition, should we establish any formal hedging policy in the future, such policy shall be subject to review and approval by our board prior to implementation.

 
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INFLATION

During the periods under review, inflation did not have a material impact on our financial performance.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

A smaller reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

The Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were not effective. The weaknesses in the Company's controls and procedures consisted of (a) a lack of expertise in identifying and addressing accounting issues under U.S. Generally Accepted Accounting Principles among the personnel in the Company's accounting department, which has resulted in certain errors in accounting identified in Note 14 to the Consolidated Financial Statements, (b) a lack of expertise among Company personnel with regard to the disclosure requirements arising under the Rules of the Securities and Exchange Commission, and (c) inadequate review by management personnel of the Company's reports prior to filing.

Changes in Internal Control Over Financial Reporting.

During the three months ended December 31, 2010, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company is a party.

Item 1A. Risk Factors

A smaller reporting company is not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On October 14, 2010, the Company issued 1,500,000 shares of common stock to six of its employees. The shares were issued in consideration of services, and were valued at the market value on the date of grant. The sale of the securities was exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act of 1933, by reason of the fact that there was no general solicitation in connection with the offering, and the fact that the purchasers had sufficient knowledge and experience to be capable of evaluating the merits and risks of the investment, and were purchasing for investment for their own accounts. There was no underwriter.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Removed and Reserved

Item 5. Other Information

None

Item 6. Exhibits

31.1
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
   
31.2
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
   
32.1
Section 1350 Certification of Chief Executive Officer
   
32.2
Section 1350 Certification of Chief Financial Officer

 
28

 
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
China Lithium Technologies, Inc.
 
       
DATE: February 25, 2011
By:  
/s/ Kun Liu 
 
   
Kun Liu, Chairman and Chief Executive Officer
 
   
(Principal Executive Officer)
 
       
       
 
By:  
/s/ Chunping Fang 
 
   
Chunping Fang, Chief Financial Officer
 
   
(Principal Financial Officer, Principal Accounting Officer)
 
 
 
29