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NEWN > SEC Filings for NEWN > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for NEW ENERGY SYSTEMS GROUP


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Forward-Looking Statements

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

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

BUSINESS OVERVIEW

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

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

The lithium battery was created in the 1990s, with the first mass production in 1993 in Japan. Lithium batteries were first used in notebook computers and now are used in cellular phones, video machines, laptops, digital cameras, MP3 players, global positioning satellite systems, 3G communication devices, hybrid cars and other electronic products. Batteries are becoming smaller, lighter, more efficient, longer lasting and free of pollution. Lithium battery energy/weight ration is higher than other batteries on the market. With an excellent safety standard. We believe lithium battery is the future of the industry. According to Market Research, the market for lithium ion battery is expected to reach $43 billion by 2020. China has become one of the largest producers and consumers of lithium ion batteries. We anticipate there will be greater demand for lithium batteries in China and worldwide in the next few years. We believe the current trend towards smaller, lighter portable consumer products will continue and because of its size, the demand for lithium batteries will keep increasing.

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


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

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

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

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

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

On November 24, 2011, the Company entered into an Equity Transfer Agreement ("Equity Transfer") with Xuemei Fang ("Fang") and Weirong Xu ("Xu", and together with Fang, the "Buyers") to transfer 100% of the equity interest of Billion Electronics Limited (BVI) to the buyers for RMB85,553,892 ($13,578,043). The selling price equaled the appraised value of Billion Electronics, including its wholly owned subsidiaries E'Jenie and NewPower, less RMB153,033,107 ($24,287,500) of debt the Company owed E'Jenie, which shall be cancelled upon completion of the Equity Transfer. Xu is the Director of Marketing of NewPower and Fang is the Vice President of E'Jenie. As of September 30, 2012, the Company received RMB 36,189,824 ($5,707,274) and had an outstanding receivable of RMB 49,364,068 ($7,784,903).

During the third quarter of 2011, the Company performed goodwill impairment assessment for NewPower. During the fourth quarter of 2011, the Company performed goodwill impairment assessment for Anytone and Kim Fai. The goodwill balance prior to the impairment charge was $60,858,842 and was established primarily as a result of a series acquisition of NewPower, Anytone and Kim Fai in 2010 and 2011. The Company completed the step one analysis using a combination of market capitalization approach and discounted cash flow. The market capitalization approach uses the Company's publicly traded stock price to determine fair value ("FV"). The Discounted Cash Flow ("DCF") method uses revenue and expense projections and risk-adjusted discount rates. The process of determining FV is subjective and requires management to exercise judgment in determining future growth rates, discount and tax rates and other factors. The current economic environment has impacted the Company's ability to forecast future demand and has in turn resulted in the use of higher discount rates, reflecting the risk and uncertainty in current markets. The results of the step one analysis indicated potential impairment in NewPower and Anytone reporting units, which were corroborated by a combination of factors including a significant and sustained decline in the market capitalization, which was significantly below the book value, and the deteriorating macro environment, which has resulted in a decline in expected future demand. The Company therefore performed the second step of the goodwill impairment assessment for NewPower and Anytone to quantify the amount of impairment. This involved calculating the implied FV of goodwill, determined in a manner similar to a purchase price allocation, and comparing the residual amount to the carrying amount of goodwill. Based on the analysis incorporating the declining market capitalization in 2011, as well as the significant end market deterioration and economic uncertainties impacting expected future demand including continued slow-down of the battery industry in China, and increased competition resulting from counterfeit products and decreased selling price from other manufacturers. The Company concluded the entire goodwill balance of NewPower of $14,306,538 and a portion of Anytone's goodwill of $7,405,344 were impaired and recorded in operating expense. The goodwill impairment charge is non-cash. The goodwill impairment charge is not deductible for income tax purposes and, therefore, the Company did not record a corresponding tax benefit in 2011. On December 9, 2011, the Company disposed its subsidiaries Billion, E'Jenie and NewPower. As of September 30, 2012, due to continuing losses, utilizing DCF analysis, the Company concluded intangible assets (primarily patents) and goodwill were impaired in the amounts of $6,086,840 and $10,058,113, respectively.


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

RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 Compared to the Three Months Ended
September 30, 2011

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

                                                    2012          % of Sales           2011          % of Sales
Net sales
Battery                                         $   1,698,783              47  %   $   1,703,729              26  %
Solar panel                                         1,937,476              53  %       4,973,124              74  %
Total sales                                         3,636,259             100  %       6,676,853             100  %

Cost of sales
Battery                                             1,551,795              43  %         800,633              12  %
Solar panel                                         1,845,789              51  %       4,667,322              70  %
Total cost of sales                                 3,397,584              93  %       5,467,955              82  %

Gross profit                                          238,675               7  %       1,208,898              18  %

Operating expenses
Selling                                               173,520               5  %         283,284               4  %
General and administrative                          1,597,636              44  %       1,541,875              23  %
Impairment of goodwill and intangible assets        7,724,857             212  %               -               -  %
Total operating expenses                            9,496,013             261  %       1,825,159              27  %

Loss from operations                               (9,257,338 )          (255 )%        (616,261 )            (9 )%

Other income, net                                       8,801            0.24  %           5,450            0.08  %

Loss before income taxes                           (9,248,537 )          (254 )%        (610,811 )            (9 )%

Income tax benefit                                (1,667,253)            (46)  %         (85,269 )            (1 )%

Loss from continuing operations, net of tax        (7,581,284 )          (208 )%       (525,542) )           (8)  %
Loss from discontinued operations, net of tax               -               -  %     (16,327,666 )          (245 )%
Net loss                                        $  (7,581,284 )          (208 )%   $ (16,853,208 )          (252 )%


Net Sales

Net sales for the three months ended September 30, 2012 was $3.64 million, compared to $6.68 million for the comparable period of 2011, a decrease of $3.04 million or 46%. Battery sales was $1.70 million for the three months ended September 30, 2012 and in the comparable period of 2011. Sales of solar products was $1.94 million in the three months ended September 30, 2012, compared to $4.97 million in the comparable period of 2011, a decrease of $3.04 million or 61%. The decrease in sales of Kim Fai (solar products) was due to (1) overall depress of the solar products industry, many companies were shut down; (2) increased competition which resulted in a lower profit margin; and (3) restrictions from foreign countries.

Cost of Sales

Cost of Sales ("COS") for the three months ended September 30, 2012 was $3.40 million, compared to $5.47 million for the comparable period of 2011, a decrease of $2.07 million, or 38% due to decreased sales and production volume.

COS for the battery segment was $1.55 million, or 91% of total battery revenue, for the three months ended September 30, 2012, compared to $0.80 million, or 47%, for the comparable period of 2011, an increase of $0.75 million, or 94%.

COS for solar products for the three months ended September 30, 2012 was $1.85 million, or 95% of solar products sales, as compared to $4.67 million or 94% of sales for the comparable period of 2011, a decrease of $2.82 million, or 60%.

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

Operating Expenses

Selling, general and administrative expenses, excluding goodwill and intangible asset impairment were $1.77 million for the three months ended September 30, 2012, or 49% of net sales, compared to $1.83 million, or 27% of net sales, for the comparable period of 2011, an decrease of $0.054 million, or 3%.

Selling expenses for the three months ended September 30, 2012 were $0.17 million, or 5% of net sales, compared to $0.28 million, or 4% of net sales, for the comparable period of 2011, a decrease of $0.11 million, or 39%, which was mainly due to the decreased sales and marketing activities.

General and administrative ("G&A") expenses for the three months ended September 30, 2012 were $1.60 million, or 44% of net sales, compared to $1.54 million, or 23% of net sales, for the comparable period of 2011. The increase in G&A expenses of $0.06 million was mainly due to the increased employees' salaries and welfare expenses. For the three months ended September 30, 2012 and 2011, the US parent company recorded $0.35 million and $0.33 million as G&A expenses, respectively. These expenses mainly included stock compensation expense to business development consultants and an IR firm, stock option and warrant compensation paid to our directors and employees and certain expenses relating to being a public company in the US, such as accounting and legal fees.


During the three months ended September 30, 2012, the Company performed a goodwill and intangible asset impairment test resulting in $1.64 million and $6.08 million impairment to goodwill and intangible assets , respectively.

Loss From Discontinued Operations, net of tax

Net income from discontinued operations, net of tax was $0 for the three months ended September 30, 2012, as compared to net loss of $16.33 million for the comparable period of 2011, which was mainly from the disposed subsidiaries, Shenzhen NewPower Technology Development Co., Ltd. ("NewPower") and E'Jenie Technology Development Co., Ltd. ("E'Jenie").

Net Loss

Net loss for the three months ended September 30, 2012 was $7.58 million compared to net loss of $16.85 million for the comparable period of 2011, a decrease of $9.27 million, or 55%, mainly due to discontinued operations loss in the third quarter of 2011.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

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

                                               2012          % of Sales           2011          % of Sales
Net sales
Battery                                    $   6,687,091              55  %   $  13,657,611              45  %
Solar panel                                    5,494,777              45  %      16,649,096              55  %
Total sales                                   12,181,868             100  %      30,306,707             100  %

Cost of sales
Battery                                        6,191,309              51  %       6,546,438              21  %
Solar panel                                    5,235,908              43  %      13,220,831              44  %
Total cost of sales                           11,427,217              94  %      19,767,269              65  %

Gross profit                                     754,651               6  %      10,539,438              35  %

Operating expenses
Selling                                          892,253               7  %         881,257               3  %
General and administrative                     4,839,943              40  %       4,197,889              14  %
Impairment of goodwill and intangible
assets                                        16,144,953             133  %               -               -  %
Total operating expenses                      21,877,149             180  %       5,079,146              17  %

Income (loss) from operations                (21,122,498 )          (173 )%       5,460,292              18  %

Other income, net                                 25,478            0.21  %          12,237            0.04  %

Income (loss) before income taxes            (21,097,020 )          (173 )%       5,472,529              18  %

Income tax expense (benefit)                  (1,966,866 )          (16)  %       1,570,786               5  %

Income (loss) from continuing
operations, net of tax                       (19,130,154 )          (157 )%       3,901,743              13  %
Loss from discontinuing operations, net

of tax - - % (12,147,523 ) (40 )% Net loss $ (19,130,154 ) (157 )% $ (8,245,780 ) (27 )%


Net Sales

Net sales for the nine months ended September 30, 2012 was $12.18 million, compared to $30.31 million for the comparable period of 2011, a decrease of $18.12 million or 60%. Battery sales, was $6.69 million for the nine months ended September 30, 2012 compared to $13.66 million in the comparable period of 2011, a decrease of $6.97 million or 51%. The decrease was mainly due to (1) the battery industry being depressed in China and market competition intensifying; and (2) integration of the business section, resulting in reduced production during the three months ended September 30, 2012 as compared to the same period of 2011. Sales of solar products was $5.49 million in the nine months ended September 30, 2012, compared to $16.65 million in the comparable period of 2011, a decrease of $11.15 million or 67%. The decrease in sales of Kim Fai (solar products) was due to (1) overall depress of the solar products industry, many companies were shut down; (2) increased competition which resulted in a lower profit margin; and (3) restrictions from foreign countries.

Cost of Sales

COS for the nine months ended September 30, 2012 was $11.43 million, compared to $19.77 million for the comparable period of 2011, a decrease of $8.34 million, or 42% due to decreased sales and production volume.

COS for the battery segment was $6.19 million, or 93% of total battery revenue, for the nine months ended September 30, 2012, compared to $6.55 million, or 48%, for the comparable period of 2011, a decrease of $0.36 million, or 5%.

COS for solar products for the nine months ended September 30, 2012 was $5.24 million, or 95% of solar products sales, as compared to $13.22 million or 79% of sales, for the comparable period of 2011, a decrease of $7.98 million, or 60%.

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

Operating Expenses

Operating expenses, excluding goodwill and intangible asset impairment, for the nine months ended September 30, 2012 were $5.73 million, or 47% of net sales, compared to $5.08 million, or 17% of net revenue, for the comparable period of 2011, an increase of $0.65 million, or 13%.

Selling expenses for the nine months ended September 30, 2012 were $0.89 million, or 7% of net sales, compared to $0.88 million, or 3% of net sales, for the comparable period of 2011, an increase of $0.01 million, or 1%, which remain the same compared to the same period of 2011.

G&A expenses for the nine months ended September 30, 2012 were $4.84 million, or 40% of net sales, compared to $4.20 million, or 14% of net sales, for the comparable period of 2011. The increase in G&A expenses of $0.64 million was mainly due to the increase of $0.23 million of employees' salary and welfare expenses. For the nine months ended September 30, 2012 and 2011, the US parent company recorded $1.19 million and $1.15 million as G&A expenses, respectively. These expenses mainly included stock compensation expense to business development consultants and an IR firm, stock option and warrant compensation paid to our directors and employees and certain expenses relating to being a public company in the US, including accounting and legal fees.

During the nine months ended September 30, 2012, the Company performed goodwill and intangible assets impairment test resulting in $10.06 million and $6.09 million impairment to goodwill and intangible assets, respectively.


Loss From Discontinued Operations, net of tax

Net loss from discontinued operations, net of tax for the nine months ended September 30, 2012 was $0 compared to $12.15 million for the comparable period of 2011, which was mainly from the disposed subsidiaries, NewPower and E'Jenie.

Net Loss

Net loss for the nine months ended September 30, 2012 was $19.13 million compared to net loss of $8.25 million for the comparable period of 2011, an increase of $10.88 million, or 132%, due to the reasons listed above.

LIQUIDITY AND CAPITAL RESOURCES

Our operations and liquidity needs are funded primarily through cash flows from
operations, short term financing and sale of Company stock. Cash and equivalents
were $10.35 million as of September 30, 2012. Working capital as of September
30, 2012 was $19.06 million.

The following is a summary of cash provided by or used in each of the indicated
types of activities during the nine months ended September 30, 2012 and 2011:

                                2012             2011
Cash provided by (used in):
Operating Activities          $   332,423     $   2,873,708
Investing Activities            5,538,993          (84,771)
Financing Activities                    -       (6,715,116)

Net cash provided by operating activities was $332,423 for the nine months ended September 30, 2012 compared to $2.87 million provided by operating activities for the comparable period of 2011. The decrease in net cash provided by operating activities for the nine months ended September 30, 2012 was mainly due to the net loss in the period and our timely payment of accounts payable, however, offset by the payment on accounts receivable from our customers for the nine months ended September 30, 2012.

Net cash provided by investing activities was $5.54 million for the nine months ended September 30, 2012 compared to $84,771 cash used in the comparable period of 2011. The cash provided in the nine months ended September 30, 2012 was mainly from the payment of $5.73 million from the sale of disposed subsidiaries; . . .

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