UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2006
[ ] Transition Report pursuant to 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period to
Commission File No. 0-13337
ADVANCED BATTERY TECHNOLOGIES, INC.
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(Name of Small Business Issuer in Its Charter)
DELAWARE 22-2497491
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21 West 39th Street, Suite 2A, New York, NY 10018
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(Address of principal executive offices)
212-391-2752
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports); and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
The number of shares outstanding of each of the issuer's class of
equity as of the latest practicable date is stated below:
Title of each class of Common Stock Outstanding as of August 18, 2006
-----------------------------------------------------------------------------
Common Stock, $0.001 par value 49,127,710
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ADVANCED BATTERY TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
June 30, 2006
(Unaudited)
USD
-------------
ASSETS
Current assets
Cash and cash equivalents 1,514
Accounts receivable 2,841,743
Inventories 314,054
Prepayments, deposits and other receivable 824,773
----------
Total current assets 3,982,084
Property, plant and equipment, net 7,708,438
Construction in process 3,966,824
Deposits for acquisition of property, plant and equipment 1,833
Rights to use land and power, net 420,030
Patents, net 103,315
Prepaid expenses 1,299,841
----------
Total assets 17,482,365
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 240,677
Accrued expenses and other payable 1,025,151
Short-term bank and other borrowings (Note 7) 3,848,157
Customer deposits 107,637
Welfare payable 145,719
----------
Total current liabilities 5,367,341
Stockholders' equity
Common stock (Note 8) 49,128
Additional paid-in capital (Note 9) 13,937,014
Accumulated deficit (2,053,706)
Accumulated other comprehensive income 182,588
----------
Total stockholders' equity 12,115,024
----------
Total liabilities and stockholders' equity 17,482,365
==========
See the accompanying notes to the unaudited consolidated financial statements
-2-
ADVANCED BATTERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, Six months ended June 30,
2006 2005 2006 2005
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
USD USD USD USD
--------------------------- -------------------------
Revenue 3,175,452 236,360 5,084,449 267,767
Cost of sales (2,133,663) (156,205) (3,340,483) (180,370)
--------- ---------- ---------- ----------
Gross profit 1,041,789 80,155 1,743,966 87,397
Other income - 578 - 1,379
Selling expenses (3,961) (5,255) (12,578) (8,251)
General and administrative
expenses (367,930) (502,237) (704,482) (944,076)
Interest expense (70,496) (61,690) (131,384) (110,406)
--------- ---------- ---------- ----------
Income/(loss) before
minority interests 599,402 (488,449) 895,522 (973,957)
Minority interests - 31,529 - 80,746
--------- ---------- ---------- ----------
Net income/(loss) 599,402 (456,920) 895,522 (893,211)
========= ========== ========== ==========
Net income/(loss) per share
Basic and diluted (Note 10) 0.013 (0.019) 0.020 (0.039)
========= ========== ========== ==========
See the accompanying notes to the unaudited consolidated financial statements
-3-
ADVANCED BATTERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
2006 2005
(Unaudited) (Unaudited)
USD USD
------------------------
Cash flows from operating activities:
Net income/(loss) 895,522 (893,211)
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in) operating
activities :
Depreciation and amortization 335,806 119,377
Amortization of prepaid expenses 177,218 677,052
Stock compensation expenses 164,178 -
Minority interests - (80,746)
Changes in operating assets and liabilities:
Accounts receivable (862,427) 258
Inventories 69,310 (132,944)
Prepayments, deposits and other receivable 105,738 (833,624)
Accounts payable, accrued expenses and other
payable (606,069) 78,287
Customer deposits (15,598) 579,317
Welfare payable 27,283 22,223
--------- ---------
Net cash provided by/(used in) operating
activities 290,961 (464,011)
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (8,801) (1,375,616)
Additions to construction in process - (1,148,454)
--------- ---------
Net cash used in investing activities (8,801) (2,524,070)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stocks - 1,691,542
Decrease in loan payable (296,041) (27,788)
Decrease in car loan (2,324) -
Increase in long-term debts - 594,116
--------- ---------
Net cash (used in)/provided by financing
activities (298,365) 2,257,870
--------- ---------
Net decrease in cash and cash equivalents (16,205) (730,211)
Effect of foreign exchange rate changes 11 2,181
Cash and cash equivalents, beginning of period 17,708 758,015
--------- ---------
Cash and cash equivalents, end of period 1,514 29,985
========= =========
See the accompanying notes to the unaudited consolidated financial statements
-4-
ADVANCED BATTERY TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
Advanced Battery Technologies, Inc. ("ABAT" or the "Company) was
incorporated in the State of Delaware on January 16, 1984.
The Company is engaged in the business of designing, manufacturing and
marketing of rechargeable polymer lithium-ion batteries through its
subsidiaries, Cashtech Investment Limited ("Cashtech") and Heilongjiang
Zhong Qiang Power-Tech Co., Ltd. ("ZQ Power-Tech"). Cashtech is a British
Virgin Islands corporation and ZQ Power-Tech is a limited liability
company established in the People's Republic of China (the "PRC") in which
Cashtech originally owned 70% interest as of December 31, 2005. On January
6, 2006, Mr. Zhiguo Fu ("Mr. Fu"), the chairman of ABAT, transferred to
Cashtech shares of ZQ Power-Tech representing 30% of the outstanding
shares of ZQ Power-Tech. As a result of the transfer, Cashtech now owns
100% of the capital stock of ZQ Power-Tech. Details of the transaction
are set out in note 5.
2. BASIS OF PRESENTATION
(i) The accompanying consolidated financial statements of the Company
and its subsidiaries (the "Group") have been prepared in accordance
with generally accepted accounting principles in the United States
of America for interim consolidated financial information.
Accordingly, they do not include all the information and notes
necessary for comprehensive consolidated financial statements.
In the opinion of the management of ABAT, all adjustments necessary
for a fair presentation of the financial position and the results
of operations and cash flows for the interim periods have been
included. Interim results are not necessarily indicative of
results for a full year.
(ii) The Group has accumulated deficit as of June 30, 2006. However,
based on the substantial backlog of orders of approximately USD6.4
million that the Group has accumulated and the Group had attained
net income for the current interim period which indicated an
improvement to the current operations, the management of the Group
believes that the backlog of orders and improved operation results
will generate sufficient revenue and cash flows to enable the Group
to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in the
section "Summary of significant accounting policies" of the consolidated
financial statements of the Company included in the Company's Form 10-KSB
submitted to the United States Securities and Exchange Commission on April
14, 2006.
-5-
ADVANCED BATTERY TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Recent accounting pronouncements
In February 2006, the Financial Accounting Standards Board issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments, which
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 155"), and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 155 simplifies the accounting for certain derivatives embedded
in other financial instruments by allowing them to be accounted for as
a whole if the holder elects to account for the whole instrument on a fair
value basis. SFAS No. 155 also clarifies and amends certain other
provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective
for all financial instruments acquired, issued or subject to a
remeasurement event occurring in fiscal years beginning after September
15, 2006. Earlier adoption is permitted, provided the Company has not
yet issued financial statements, including for interim periods, for that
fiscal year. We do not expect the adoption of SFAS No. 155 to have a
material impact on our consolidated financial position, results of
operations or cash flows as the Company currently has no financial
instruments within the scope of SFAS No. 155. The Company does not
anticipate the adoption of SFAS No. 155 to have a material impact as it
currently has no financial instruments within the scope of SFAS No. 155.
In March 2006, the Financial Accounting Standards Board issued SFAS No.
156, Accounting for Servicing of Financial Assets, which amends SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 156 requires that all separately
recognized servicing assets and servicing liabilities be initially
measured at fair value. The company can elect subsequent fair value
measurement of its servicing assets and servicing liabilities by class,
thus simplifying its accounting and providing for income statement
recognition of the potential offsetting changes in fair value of the
servicing assets, servicing liabilities, and related derivative
instruments. SFAS No. 156 is effective for all financial instruments
acquired, issued or subject to a remeasurement event occurring in fiscal
years beginning after September 15, 2006. Earlier adoption is permitted
as of the beginning of an entity's fiscal year, provided the company has
not yet issued financial statements, including interim financial
statements, for any period of that fiscal year. The Company does not early
adopt SFAS No. 156.
4. INCOME TAXES
No provision for income tax is made as the Company's operating subsidiary
in the PRC is entitled to an income tax holiday. The subsidiary is eligible
to the income tax holiday of 5 years commencing from its first
profit-making year.
5. ACQUSITION OF MINORITY INTERESTS IN ZQ POWER-TECH
As mentioned in note 1, Mr. Fu transferred his 30% interest in ZQ
Power-Tech to Cashtech in exchange for 11,780,594 shares of the Company's
common stock.
The amount of USD1,865,456, which represents the share of net assets by
Mr. Fu in ZQ Power-Tech in excess of par value of the shares issued, was
included in additional paid-in capital.
-6-
ADVANCED BATTERY TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. ACQUISITION OF A PATENT
On January 10, 2006, ABAT issued 4,400,000 shares of common stock to Mr.
Fu in return for a patent transferred to ZQ Power-Tech by him.
The patent was recognized at the par value of the shares issued due to
the nature of transaction being between related parties.
7. SHORT-TERM BANK AND OTHER BORROWINGS
Short-term bank and other borrowings consist of the following:
USD
Bank borrowings (Note 7(i)) 3,372,300
Loan payable (Note 7(ii)) 374,700
Other loan payable (Note 7(iii)) 101,157
---------
3,848,157
=========
(i) The bank loans have maturity of less than one year from June 30,
2006 and are secured by the Group's buildings and right to use land.
Loan amounts of USD2,498,000, USD624,500 and USD249,800 bear
interest at 8.064%, 6.045% and 5.655% per annum respectively.
(ii) The loan payable represents an interest-free and unsecured demand
loan from Shuangcheng National Owned Assets Operation Ltd. with on
fixed term of repayment.
(iii) The other loans are due to non-related third parties and are
interest-free, unsecured and repayable on demand.
8. COMMON STOCK
No. of shares Amount
USD
Authorized :- -----------------------
Common stock at USD0.001 par value 60,000,000 60,000
========== ======
Issued and outstanding :-
At January 1, 2006 25,337,116 25,337
Shares issued for acquisition of
minority interests in ZQ Power-Tech
(Note 5) 11,780,594 11,781
Shares issued for acquisition of a
patent (Note6) 4,400,000 4,400
Shares issued to consultants
(Note 8(i)) 60,000 60
Shares issued to employees
(Note 8(ii)) 7,550,000 7,550
---------- ------
At June 30, 2006 49,127,710 49,128
========== ======
-7-
ADVANCED BATTERY TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMON STOCK (CONT'D)
Note :-
(i) 60,000 shares of common stock were issued as full compensation to
three consultants for the provision of research and development
services to the Company. An amount of USD34,740, which represents
the aggregate fair value of the shares issued in excess of par
value, was included in additional paid-in capital.
(ii) 7,550,000 shares of common stock were issued to twenty-five
employees for the provision of future services to the Company.
1,530,000 shares of common stock was granted to five employees under
the 2004 Equity Incentive Plan and the remaining 6,020,000 shares
were granted to twenty employees under the 2006 Equity Incentive
Plan.
9. ADDITIONAL PAID-IN CAPITAL
Included in additional paid-in capital is :-
(i) An amount of USD1,865,456 which relates to the acquisition of
minority interests in ZQ Power-Tech (Note 5);
(ii) An amount of USD34,740 which relates to the issuance of shares
to consultants (Note 8(i));
(iii) A debit balance of USD1,804,733 which represents the balance of
unearned stock compensation. Following the adoption of FAS123R,
any unearned stock compensation should be netted against additional
paid-in capital and be recognized over the remaining period with a
debit to statement of operations as compensation expenses and a
credit to additional paid-in capital; and
(iv) An amount of USD55,428 which relates to the issuance of stocks to
employees (Note 8(ii)).
-8-
ADVANCED BATTERY TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. NET INCOME/(LOSS) PER SHARE - BASIC AND DILUTED
The basic and diluted net income/(loss) per share is calculated using
the net income/(loss) and the weighted average number of common stock
outstanding during both interim periods. The Company has no dilutive
instruments and accordingly, the basic and diluted net income/(loss) per
share are the same.
Three months ended June 30, Six months ended June 30,
2006 2005 2006 2005
--------------------------- -------------------------
Net income/(loss) USD599,402 USD(456,920) USD895,522 USD(893,211)
========== =========== ========== ===========
Weighted average
number of shares
outstanding 44,664,450 24,599,753 44,015,591 23,050,807
========== =========== ========== ===========
Net income/(loss)
per share USD0.013 USD(0.019) USD0.020 USD(0.039)
========== =========== ========== ===========
11. SUPPLEMENTAL CASH FLOW INFORMATION
Six months ended June 30,
2006 2005
USD USD
-------------------------
Interest paid 131,384 110,406
======= =======
Other than the above-mentioned information, during the six months ended
June 30, 2006, there were non-cash transactions regarding the issuance
of the Company's common stock for the acquisitions of minority interests
in ZQ Power-Tech (Note 5) and a patent (Note 6), and for the provision
of services by certain consultants (Note 8(i)) and employees (Note 8(ii))
respectively.
12. EQUITY INCENTIVE PLAN
(i) The Company adopted the 2004 Equity Incentive Plan (the "2004 Plan")
on August 24, 2004. The purpose of the 2004 Plan is to promote the
success and enhance the value of the Company by linking the personal
interests of the participants of the 2004 Plan to those of the
Company's shareholders, and by providing the participants with an
incentive for outstanding performance. The 2004 Plan is further
intended to attract and retain the services of the participants upon
whose judgment, interest, and special efforts the successful
operation of the Group is dependent. The Company has reserved
5,000,000 shares of common stock for the options and awards under
the 2004 Plan.
Subject to the terms and provisions of the 2004 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.
-9-
ADVANCED BATTERY TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. EQUITY INCENTIVE PLAN (CONT'D)
The Committee appointed by the Board of Directors to administer the
2004 Plan shall have the authority to determine all matters relating
to the options to be granted under the plan including selection of
the individuals to be granted awards or stock options, the number
of stocks, the date, the termination of the stock options or awards,
the stock option term, vesting schedules and all other terms and
conditions thereof.
The Company measures the compensation cost from share-based payment
arrangements with employees with reference to the trading price of
the Company's common stock as quoted on the OTC Bulletin Board
("OTCBB") on the date of grant.
A summary of the status of the Company's unearned stock compensation
as of June 30, 2006, and changes during the six months ended June
30, 2006, is presented below:
USD
Unearned stock compensation as of January 1, 2006 1,905,933
Unearned stock compensation granted 887,400
Compensation expenses debited to statement of
operations with a credit to additional paid-in capital (115,071)
---------
Unearned stock compensation as of June 30, 2006 2,678,262
=========
The unearned stock compensation granted during the current period
relates to 1,530,000 shares of common stock granted to five
employees (note 8(ii)). The weighted-average grant-date fair value
per share is USD0.58. The total unearned stock compensation as
of June 30, 2006 is expected to be recognized over a weighted-
average period of 9.92 years.
In addition, the compensation cost capitalized as an asset in
relation to shares issued under the 2004 Plan in prior years and
current period was USD1,299,842. Included were the 60,000 shares
of common stock entitled by the consultants as disclosed in note
8(i) and the weighted-average grant-date fair value per share is
USD0.58. The compensation cost capitalized was classified as
prepaid expenses in the consolidated balance sheet and the
amortization for the six months ended June 30, 2006 was USD177,218.
The prepaid expenses is expected to be recognized over a weighted-
average period of 4.5 years.
(ii) The Company adopted the 2006 Equity Incentive Plan (the "2006
Plan") on April 24, 2006.
The 2006 Plan became effective on April 18, 2006. Its purpose is
to promote the success and enhance the value of the Company by
linking the personal interests of the participants to those of the
Company's shareholders, and by providing participants with an
incentive for outstanding performance. The 2006 Plan is further
intended to attract and retain the services of the participants upon
whose judgment, interest and special efforts the successful
operation of the Company and its subsidiaries is dependent.
-10-
ADVANCED BATTERY TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. EQUITY INCENTIVE PLAN (CONT'D)
The number of shares available for grant under the 2006 Plan shall
not exceed 8,000,000 shares. Shares of stock and options may be
granted to the eligible persons at the discretion of the Company's
Board of Directors or the Committee administering the plan.
Incentive stock options ("ISO"), nonqualified stock options
("NQSO"), or a combination thereof may be granted but ISOs can only
be granted to the Company's employees. The Committee can also grant
shares of restricted stock or performance shares (a performance
share is equivalent in value to a share of stock) to eligible
persons at any time and from time to time.
The exercise price for each ISO awarded under the 2006 Plan shall
be equal to 100% of the fair market value of a share on the date
the option is granted and be 110% of the fair market value if the
eligible person owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of
its parent or subsidiary corporations. The exercise price of a NQSO
shall be determined by the Committee in its sole discretion.
Each option shall expire at such time as the Committee determines
at the time of grant and no option shall be exercisable later than
the tenth anniversary date of its grant. The eligible person who
owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of its parent or
subsidiary corporations shall exercise his/her option before the
fifth anniversary date of its grant.
Options shall vest at such times and under such terms and conditions
as determined by the Committee; provided, however, unless a different
vesting period is provided by the Committee at or before the grant of
an option, the options will vest on the first anniversary of the
grant. Options granted under the 2006 Plan shall be exercisable at
such times and be subject to such restrictions and conditions as the
Committee shall in each instance approve, which need not be the
same for each grant or for each participant.
No award may be made under the 2006 Plan after December 31, 2015.
The Company measures the compensation cost from share-based payment
arrangements with employees with reference to the trading price of
the Company's common stock as quoted on the OTCBB on the date of
grant.
A summary of the status of the Company's unearned stock compensation
as of June 30, 2006, and changes during the six months ended June
30, 2006, is presented below:
USD
---------
Unearned stock compensation as of January 1, 2006 -
Unearned stock compensation granted 3,491,600
Compensation expenses debited to statement of
operations with a credit to additional paid-in
capital (49,107)
---------
Unearned stock compensation as of June 30, 2006 3,442,493
=========
-11-
ADVANCED BATTERY TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. EQUITY INCENTIVE PLAN (CONT'D)
The unearned stock compensation granted during the current period
relates to 6,020,000 shares of common stock granted to five employees
(note 8(ii)). The weighted-average grant-date fair value per share is
USD0.58. The total unearned stock compensation as of June 30, 2006
is expected to be recognized over a weighted-average period of 15.3 years.
(iii) The total compensation cost for share-based payment arrangements
as detailed in notes 12(i) and 12(ii) was as follows:
USD
Amortization of prepaid expenses 177,218
Stock compensation expenses 164,178
-------
341,396
=======
(iv) Other than the transactions as detailed in notes 12(i) and 12(ii),
no options or awards have been made, exercised or lapsed during the
six months ended June 30, 2006 under the 2004 Plan and the 2006 Plan.
13. COMMITMENTS
At of June 30, 2006, the Group had agreed to pay USD136,356 to Harbin
Institute of Technology for the research and development of polymer
lithium-ion batteries for motor vehicles.
14. WARRANTIES
The Group warrants that all batteries manufactured by it will be free from
defects in material and workmanship under normal use for a period of one
year from the date of shipment. The Group's experience for costs and
expenses in connection with such warranties has been minimal and during
the three months ended June 30, 2006, no amounts have been considered
necessary to reserve for warranty costs.
15. RELATED PARTY TRANSACTIONS
Apart from the acquisitions of minority interests in ZQ Power-Tech and
a patent from Mr. Fu as referred to in notes 5 and 6 respectively, during
the period ended June 30, 2006, the Group had no other material
transactions with its related parties.
-12-
Item 1. Management's Discussion and Analysis or Plan of Operation
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 include 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. Readers are cautioned
that there are risks and uncertainties which may cause actual future
results to differ from the results anticipated in these forward-looking
statements. A detailed discussion of some of the risks that may cause
such a difference has been set forth in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2005 in the section numbered
"Item 6" under the heading "Risk Factors That May Affect Future Results."
Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's opinions only as of the
date hereof. We disclaim any obligation to publicly update these
statements, or disclose any difference between its actual results and
those reflected in these statements.
Results of Operations
During the year ended December 31, 2003 the activities of our
operating subsidiary, "ZQ Power-Tech," were focused on development of its
product line and the build-out of its manufacturing facility. ZQ Power-
Tech recorded its first significant revenues in the first half of 2004,
ending June 30, 2004. For that six month period, it recorded sales
totaling $968,675.
The Company's level of sales fell in the second half of 2004 to
$222,834. The reduction occurred primarily because the Company obtained
the financing needed to complete additional factory facilities at ZQ
Power-Tech's campus in Heilongjiang. Production was reduced to minimal
or none, as management focused on doubling the Company's production
capacity and training the necessary personnel. Between 2004 and the end
of 2005, the number of employees at our facility increased from 300 to
1260, as we more than doubled our production capacity to its current
level of $40 million per year. We now have two buildings ("A" and "B")
in full production, and continue to outfit buildings "C" and "D."
In the fall of 2005 we returned to full production, shipping
$2,618,165 of product in the fourth quarter, to produce total revenues in
2005 of $4,222,960. Our increased level of activity continued into the
first six months of 2006, during which we recorded $5,084,449 in revenue.
By comparison, our revenue during the first six months of 2005 was only
$267,767, as we were focused on building our facility at that time. Since
we currently have a backlog of approximately $6.4 million, we expect to
maintain the level of operations that we achieved in the first six months
of 2006. We do not include in our current backlog the $21 million order
placed by Aiyingsi in 2004, since the delivery times for that order have
been delayed indefinitely.
-13-
ZQ Power-Tech realized a 34% gross margin on its sales in the six
months ended June 30, 2006, approximating the 33% ratio that we realized
in the first six months of 2005. Our gross margin ratio in the future
will depend considerably upon which of ZQ Power-Tech's products are
dominating sales. However we do expect our operations in 2006 and beyond
to be more efficient than they have been in the past, as we are
implementing advanced production management systems. We are also gaining
experience with our new production lines, which are enabling us to
improve the efficiency of the lines and to discover lower-cost sources of
raw materials for our products.
Our general and administrative expense fell from $944,076 in the
first six months of 2005 to $704,482 (14% of revenue) in the first six
months of 2006. The reduction reflected, in part, our efforts to
increase efficiencies in our operations. The greatest part of the
reduction, however, was attributable to the fact that general and
administrative expense in 2006 included a non-cash expense of $677,052
that was primarily attributable to amortization of prepaid consulting
fees that were paid by issuing common stock to the consultants. At June
30, 2006 there remained on the Company's balance sheets $1,299,841 in
prepaid expenses that are attributable to prepaid consulting fees to the
Company's consultants. We amortized $177,218 of prepaid expenses and
recognized $164,178 stock compensation expenses during the first six months
of 2006. The remaining prepaid expenses and unearned stock compensation will
be amortized and recognized over the next few years.
The Company's revenue less expenses produced an income of $895,522,
compared to a loss before minority interest of $973,957 in the first six
months of 2005. In 2005, however, Advanced Battery owned only 70% of ZQ
Power-Tech. For that reason, our net loss for the six months ended June
30, 2005 was reduced by $80,746, representing the 30% of the net loss of
ZQ Power-Tech that we did not own. In January 2006 our Chairman, Fu
Zhiguo, transferred the remaining 30% of ZQ Power-Tech into the Company's
control. In 2006 and hereafter, therefore, we will be able to include
100% of the net income of ZQ Power-Tech in the net income for Advanced
Battery Technologies.
Liquidity and Capital Resources
Until December 2004, the development and initial operations of ZQ
Power-Tech were financed primarily by contributions to capital made by Fu
Zhiguo, the Company's Chairman. On December 1, 2004, ZQ Power-Tech
entered into a Loan Agreement with China Financial Bank, and received a
loan of 20 million RMB (approximately $2.4 million). The Loan Agreement
requires that the principal be paid in a balloon in November 2006.
Interest at 8.064% per annum is payable monthly. $1.9 million of the
obligation is secured by a pledge of ZQ Power-Tech's manufacturing
facilities; the remainder of the debt is secured by a pledge of our
realty assets.
At June 30, 2006 the Company had a working capital deficit of
$1,385,257, an improvement of $1,537,514 since December 31, 2005. The
primary reason for the decrease in the deficit was the fact that we used
the net income in the first six months to reduce our accounts payable by
76%. In addition, we determined that we were entitled to a tax refund of
$206,699 from the government of China, which we received in the second
quarter of 2006.
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Although our net income for the first six months of 2006 was
$895,522, our operations provided only $290,961 in cash for the period,
compared to a reduction in cash of $464,011 in the first six months of
2005. The primary reason for this disparity was the fact that our
accounts receivable increased during the recent six month period by
nearly the amount of our net income. As we seek new market share, we are
tolerating extended payments from a number of our customers, particularly
our primary distributor, who is allowed 120 days to pay its receivables.
For this reason, the growth in our net income will not produce a
proportionate increase in cash until we are able to secure better payment
terms from our customers.
Despite its negative working capital, ZQ Power-Tech has sufficient
liquidity to fund its near-term operations. The principal capital
resource available is $12,097,125 in property, plant and equipment,
construction in process, and real property rights, which ZQ Power-Tech
owns subject only to the China Financial Bank lien for $3.4 million.
Based on the substantial backlog of orders that ZQ Power-Tech has
accumulated, it believes that additional secured financing will be
available to it on favorable terms when needed. Until then, if short-
term cash shortages occur, Mr. Fu has committed to provide financing as
needed.
Based upon the financial resources available to ZQ Power-Tech,
management believes that it has sufficient capital and liquidity to
sustain operations for the foreseeable future.
Item 3. Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the
period covered by this report. The evaluation was undertaken in
consultation with our accounting personnel. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures are currently effective to ensure
that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms. As we develop
new business or if we engage in an extraordinary transaction, we will
review our disclosure controls and procedures and make sure that they
remain adequate.
There were no changes in the internal controls over our financial
reporting that occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters To a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Exhibits
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ADVANCED BATTERY TECHNOLOGIES, INC.
Date: August 18, 2006 By: /s/ Zhiguo Fu
-------------------------------------
Name: Zhiguo Fu
Title: Chief Executive Officer
Date: August 18, 2006 By: /s/ Guohua Wan
-------------------------------------
Name: Guohua Wan
Title: Chief Financial Officer
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